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Notification No. 49/2019-Central Tax has been issued by CBIC last week carrying our various amendments in the CGST Rules. One of the important amendments in the Rules which was pronounced in the GST Council press release is to permit the credit to the recipient only if the corresponding supplies have been reported in the GSTR-1 by his suppliers. This amendment is in line with the new return format which is going to be effective w.e.f. 1.4.2020. The purpose is to reduce large number of instances of fake invoices where fraudulent credits have been availed to deceive exchequer. The amendment has been given effect to by inserting sub rule 4 in the Rule 36 of CGST Rule. The relevant extract of amendment is as under:

“(4) Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 20 per cent. of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section ”.

We discuss the various aspects of the amendment in the below discussion.

Legal ramifications of the amendment

The amendment has been made in the CGST Rules leading to a question as to what is legal ramification of such amendment.

1. Ultra virus: The restriction of the ITC to the extent of certain percentage appears to be ex facie illegal on multiple grounds;

  • Vice of excessive delegation: The Central Government has resorted to usurp its power of executive function by introducing a substantive legislative power in the guise of rules. The restriction on the quantum of ITC was incorporated by the Parliament vide the newly introduced Section 43A (4) of the CGST Act. The Central government without notifying the provisions of Section 43A has at its whim introduced the quantum-ary restriction and usurping its own function. It has been well settled that Indian Constitution recognizes the concept of distribution of powers, where the executive arm cannot exercise powers of legislative arm and any such exercised action is void ab nitio [Alstom India Ltd. (Gujarat High Court)]. The introduction of Rule 36 (4) suffers from vice of excessive delegation and hence liable to struck down.
  • Violates the right of the recipient: The amended rule 36 (4) lacks the machinery provisions for the de facto implementation. The originally thought after Section 37, 38 and 39 of the CGST Act in consonance provides for the machinery provisions for matching and reconciliation of the Input Tax Credit between a supplier and the recipient of supplies. GSTR 2 enables the recipient to upload the invoices which were missed by the supplier and therefore providing a stop gap for the proper reconciliation, and therefore enabling implementation of the system. The new introduced system of restriction leaves the recipient of supplies at the whims of the supplier in as much as it is only the supplier who governs the flow of the ITC to the recipient, meaning thereby skinning off the recipient of his substantive right to offer invoices for matching. The amendment therefore de facto injures the substantive right of recipient of supplies in blatant violation of the law. In erstwhile service tax era, the Supreme Court had observed in the case of Kay Kay Industries [ 2013(295) ELT(177) that it would be practically impossible to do so.
  • Arbitrary, unreasonable and un-intelligent differentia: The government at its whims have introduced the restriction of ITC to the extent of 20% without any basis. The 20% threshold in essence indicates that only 20% of the taxpayers who are unable to file their GSTR 1 have been defaulting in the tax payments. Given the inadequacy of the common portal and the teething problems therein, it is highly irrational to pre-suppose that only 20% of the un-uploaded supplies are genuine, particularly when government GST collection has not fallen any-where below 10-15% over any month over its 2 years’ implementation. The 20% threshold is therefore arbitrary, without basis and creates un-intelligent differntia between persons whose’ vendors have uploaded supplies and whose’ vendors haven’t, and accordingly is in violation of Article 14 and 19 of the Constitution of India.

2. Rule 36 (4) is an abstract provision: Rule 36 (4) is plainly mechanical in as much as it doesn’t indicate as when the threshold of 20% is to be seen. Following could be perused;

  • Cannot be implemented at the time of receipt of invoice: It is trite law that the eligibility of Credit is to be seen at the time of receipt of supplies/ invoice and any post facto adjustment/ reversal is to be undertaken as per the law prescribed therein. It is highly inconceivable to satisfy Rule 36 (4) condition at the time of receipt of invoice of goods, since the supplier himself is accorded 10 days beyond the very month to upload the suppliers, therefore Rule 36 (4) cannot insist upon checking of uploading of the invoice on the portal by the
  • Lacks the machinery for post facto implementation: Rule 36 (4) merely states the threshold of ITC restriction, it nowhere suggests when such threshold is to be seen. The non-specification of the time, leaves the recipient to assume that this condition could be satisfied at any time viz. it is not necessary for the supplier to upload the invoice at any given point of time, and therefore the recipient could pre-suppose that the supplier would be uploading the invoice, meaning thereby he may not need to see the threshold while furnishing monthly returns or for that matter even the annual return. Rule 36 (4) rule lacks the proper machinery provisions, and therefore fails in its implementation.

3. Retrospective or prospective: Rule 36 (4) is introduced as condition for availing ITC, and in the amendment notification, it has been categorically said the amendments shall be come into effect from the date of their publication in the official gazette. Therefore there is categorical annunciation in the notification as to the prospective effect of the amendment, meaning thereby the revenue cannot insist upon the threshold from a retrospective date. This also means that the taxpayer would have to segregate the invoices received before 9th October 2019 and afterwards and apply the threshold only to latter

The amendment has to pass through the above legal tests at various legal forums in days to come.

Essence of the amendment:

The amendment in the rule has following essential features:

1. Registered Person (RP) has to ensure that the suppliers have uploaded the invoices and debit notes in their GSTR-1. The RP can avail the credit on such invoices immediately in the same month.

e.g. RP has received inward supply of 10 lakh in the month of October 2019 from Mr. A which has been declared by Mr. A in his GSTR-1 filed on November 11, 2019. RP can avail the ITC of the same in the GSTR-3B for the month of October 2019 to be filed on or before 20th November 2019.

2. In respect of the inward supplies where invoices have been received but the suppliers have not filed GSTR-1 or have not uploaded such invoices in the GSTR-1, the recipient does not have liberty to avail all such credits. RP can avail only maximum of 20% of the eligible credit which is reflecting in the GSTR-2A on the common portal. There is no reference in the Rule as to whether such reconciliation has to be done at invoice level or aggregate level. Considering the fact that there is no reporting of input tax credits at the invoice level in GSTR-3B, such computation has to be made at the aggregate level for availment and disclosure of ITC. However, the RP may have to reconcile and maintain the detailed reconciliation with him in order to substantiate the credit availed.

Below illustration explains the manner in which new mechanism would work. The computation has been made at invoice level for ease of understanding.

Details of supplies received:

Nature of credit Tax involved on total inward supply Value of taxes declared in the invoices Credit out of uploaded invoice Credit out of invoices not uploaded Total Credit Total Carried forward for next period
Category 1: Details of total invoices uploaded
Eligible 1,00,000/- 1,00,000/-


1,00,000/- 0 1,00,000/- 0
Ineligible 20,000/- 20,000/- NA NA NA NA
Total 1,20,000/- 1,20,000/- 1,00,000/- 0 1,00,000/- 0
Category 2: Details of invoices partially uploaded
Eligible 60,000/-** 20,000/-* 20,000/- 16,000/-


36,000/- 24,000
Ineligible 5,000/- 2,000/- NA NA NA NA
Total 65,000/- 22,000/- 20,000/- 16,000/- 36,000/- 24,000
Category 3: Details of invoices not uploaded
Eligible 20,000/-** 0 0 8,000/-# 8,000/- 12,000
Ineligible 8,000/- Nil NA NA NA NA
Total 28,000/- 0 0 8,000/- 8,000/- 12,000


2,13,000/- 1,42,000/- 1,20,000/- 24,000/- 1,44,000/- 36,000

* total eligible uploaded – Rs. 1,20,000/-

total credit to be available out of invoices not uploaded: 20% of Rs. 1,20,000= Rs. 24,000/-. This may be availed as below-

** Maximum total eligible in Category 2 and 3 out of invoice not uploaded = Rs. 60,000/- (40000+20000)

# Availment out of category 2: (60,000-20,000)*24,000/60,000= 16,000

# Availment out of category 3: 20,000*24000/60,000= Rs. 8,000/-

Above table indicates that all registered persons may have to carry out invoice level reconciliation to identify the maximum eligible credit in the concerned month.

3. The limit of 20% has to be computed out of eligible credit in respect of which invoices have been uploaded by the suppliers. There could be instances where invoices have been uploaded by the suppliers but credit is not eligible in respect of such invoices. Such invoices have to be ignored for computation of limit of 20%. If some of the credits were considered eligible by the registered person on the date of availment which is subsequently held to be ineligible, there could be impact on eligible credit based on 20%

4. Where credit could not be availed in one month on account of non-filing of return by the suppliers or non uploading of the invoices, such credit may be kept pending for availment in the subsequent months. RP has to maintain detailed month wise reconciliation statement.

5. The RP would be left with effective 7-8 working days for above reconciliation as the suppliers would be filing GSTR-1 by 11th of the respective month whereas GSTR-3B has to be filed by 20th of the month. In case of assesses having large volume of data, this could be mammoth task.

6. Though there is no specific mention but in our view, following nature of credit should not be covered by the limitation:

a. RCM credit

b. Credit on import of goods

c. Reavailment of credit under Rule 42, 43 and Rule 37

d. Credit directly credited to the electronics credit register i.e. ITC-02

e. Reavailment of credit wrongly reversed earlier

7. If the credits are availed beyond this limit, there could always be allegation that the credit has been availed more than eligible credit attracting risk of interest and penalty

8. There is no change in the format of GSTR-3B for above reporting purpose. All such details have to be maintained by the RP in their accounts and records. There could be possibility in future that some checks are built in GSTR-3B whereby restriction is placed on availment of credit within above

Challenges in the new system

Considering that GSTR-1 can be amended by the suppliers and GSTR-2A gets  updated on regular basis, the new system is going to pose many challenges for taking the ITC. Following could be major challenges in the new system:

1. Invoice level reconciliation: Though the mechanism provide for taking ITC based on the total amount of credit appearing in the GSTR-2A, but one has to reconcile at invoice level for the purpose of taking ITC. This would necessitate to have invoice level reconciliation to identify the instances of non- uploading/non filing of return by the suppliers. Normally it has been seen that there are many errors in data entry leading to variation in the invoice number, invoice date etc. which could make the reconciliation exercise

2. Methodology of 20%: There is need to understand the methodology of 20% correctly as to whether it is on cumulative basis or monthly basis. Though it not specifically coming out of the amendment, but the logical interpretation would be to have the ratio of 20% on cumulative basis. This would require the RP to give consider all past open items also before taking ITC of any particular months. Further, there is no clarity as to whether such reconciliation has to be done annually or spill over in the next FY. A clarification on this by Government is highly

3. Amendment of invoices: The suppliers can amend the invoices for any particular FY upto the due date of filing of Return for the September month of next FY. There could be possibility that invoice got reconciled and credit availed but subsequently supplier amendment/cancelled invoice. This would require reconciliation of past reconciled data also to ensure that effect of all such amendments/cancellations are

Also if the supplier has reported incorrect GSTIN number for an invoice in GSTR-1 and hence amended the GSTIN of such invoice in his GSTR-1, GST portal does not remove the original invoice from the GSTR-2A of the person whose GSTIN number was originally reported. Further amended invoice would appear as amendment in GSTR-2A of the actual recipient. This would also pose problems at the time of taking ITC on the basis of GSTR-2A.

4. Vendor filing returns on quarterly basis: There could be instances where vendors are filing returns on quarterly basis and accordingly their invoices would appear in GSTR-2A at the end of quarter. However, the RP would be willing to take ITC on the monthly basis for the supplies received in that This would create differences in the ITC available on the common portal viz a viz ITC as per books of account. The new provision could be nightmare for such small suppliers as their corporate customers could look for alternative sources in order avoid the reconciliation exercise and address the cash flow concerns.

5. Issuance of credit notes: There could be instances where invoices have been matched in the past but credit notes have been issued by vendor in subsequent months. There would be need to keep track of such credit notes for adjustments in the subsequent months of GSTR-3B.

6. Invoice uploaded by the suppliers but supply not received: As the supply may have not been received in the concerned month but invoices have been received, such supplies may not be eligible for availlment of credit under section 16. Accordingly, the effect of the same has to be considered in computation of 20% adhoc credit and such invoices should be parked for availment of ITC thereon in the subsequent months.

7. Reverse charge supplies where suppliers are registered: Many time, taxes are paid under RCM but supplier is registered with department. There is need for filing of GSTR-1 by the supplier in such cases also pays and the invoices appear in the GSTR-2A also. There is no clarity as to whether availment of credit of such RCM should also be backed up by the corresponding entries in the GSTR-2A. As there is no need to prepare the self invoice on the supplies received from registered person liable under RCM, there may be need for such suppliers to report the supplies on the portal for recipient to avail ITC. There is another view also that availment of credit on ITC under RCM is based on payment of tax by the recipient under RCM and hence credit of the same should be permissible even if not appearing in the common portal.

8. Wrong place of supplies mentioned by the suppliers: There could be possibility of suppliers mentioning wrong place of supply in their GSTR-1 (resulting in wrong POS appearing in GSTR-2A). However, physical invoices issued by the suppliers have correct invoices. This would necessitate the correction of POS by the vendor so that the credit of the same is not questioned to the RP. Also, the challenge could be higher in cases where supplies is received from vendor having multiple registrations by the customer having multiple registrations as there is possibility of reporting of wrong GSTINs.

9. Blank GSTR-2A: It could be possible that a person has started new business and have limited inward supplies. Vendor of suppliers have not uploaded invoice and hence there is no amount appearing in the GSTR-2A. This could result in complete denial of ITC to the recipient.

10. Errors in GSTR-2A generated from portal: 2A generated from the portal has many inherent limitations and may times provide wrong/incomplete information. This could seriously jeopardise the right of the RP to avail the credit.

11. Transitional challenges: Unlike new return format where specific provisions have been provided for availment of transitional credit i.e. ITC pertaining to earlier period (in old return format) to be availed in new period (new return format). However, there are no specific provisions provided for the availment of ITC pertaining to pre amendment period. There could be possibility that the RP avails the ITC of invoices pertaining to earlier period on account of which thee limit is crossed. There should have been specific provisions for the treatment of such transitional

Many more……

Need for the business to do

In view of the discussion made earlier, there are serious questions as to the legal validity of the amendment. However, many of the organisations may prefer to abide by the new rule to unnecessarily avoid the litigation. Following could be major action plans for the business to implement new system:

1. Vendor evaluation: Concept of vendor rating was envisaged on the GST common portal at the time of introduction of GST. However, it could not be launched owing to non implementation of complete mechanism of GSTR-1, GSTR-2 and GSTR-3. However, it seems that the vendor evaluation has become mandatory exercise under new regime. There could be various parameters to assess the quality of vendor mix on various risk parameters i.e. organisational risk, industry risk, compliance and regulatory risk, documentation risk

2. Changes in the ERP system: Hitherto, reconciliation of input tax credits with the GSTR-2A was a post facto exercise. However, under the new regime, there would be need to have prior reconciliation of ITC before availing credit thereof.

This would create the need of developing the ERP system wherein 2A gets automatically updated and reconciled with the input tax credits as availed in the books of account. Further, there would be need to have different reconciliation bucket in the ERP system and tracking of all matching/mismatching. There may be need to have some changes in the presently adopted accounting practices.

3. Training of purchase department and vendors: There is need for all business to train their vendors and purchase department so that they could understand the new mechanism and are sensitized about the impact of the same on the business and continuing

4. Cash flow planning: There could be possibilities that the credit availbel for setting of the liability in the return is less than the credit available in the books of account. This could require reworking of the cash flow position of the organisation.

5. Efficient return filing system: Unlike past wherein there were no system checks from Government as to availment of credit, now onwards it would be imperative for the business to have more efficient return filing system as any mismatch between the credit as per 2A viz a viz availed in GSTR-3B beyond the threshold limit could invite the penal consequences by

Many more….


To conclude it can be said that compliance of Rule 36 (4) is a daunting task for the industries who operates in un-organized and semi-organized sectors. It would well nigh not be possible for 80% of the tax payers. Only the organised and well staffed, well consulted industries would be able to comply.

It appears to be a case of “throwing out the baby with the dirty bathwater”. The government in its attempt to stop the practices of fake invoices, has resorted to a retrograde measure and have lowered the confidence of the entire nation. The judicial Courts are also expected to take cognizance of the fallacious nature of the provision and its arbitrariness, so as to read down the same. In the author’s view, the provision is draconian and does not achieve the stated objective of GST to avoid cascading. It should be withdrawn as soon as possible. Feedback at 

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  1. manognt says:

    Very well analyzed Sir. Instead of doing this hazardous computation monthly what if we claim just the amounts that are reflected in 2A until this provision is withdrawn or streamlined with all the necessary clarifications at least?

  2. MANOHAR CH L says:

    Very well analyzed Sir. Instead of doing this hazardous computation monthly what if we claim just the amounts that are reflected in 2A until this provision is withdrawn or streamlined with all the necessary clarifications at least?

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May 2024