ITC restriction of 20% against invoices not uploaded by suppliers

Introduction

Central Board of Indirect tax and Customs (‘CBIC’) has released Notification No. 49/2019 – Central tax – dated 09 October, 2019 wherein vide Rule 36(4) of the Central Goods and Services tax Rules, 2017 (‘CGST Rules, 2017’) it has placed a cap on availment of Input Tax Credit (‘ITC’) to the extent to 20% of eligible input invoices or debit notes against invoices not uploaded by supplier in their respective FORM GSTR-1. The said rule reads 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 37.”

This would mean that claim of ITC by the recipient would become final only when it is matched with the details uploaded by the supplier in their respective GSTR-1. Further, in respect to the said rule, a registered person would be eligible to avail the following ITC:

1. Full ITC in respect to the eligible input invoices which are available in its FORM GSTR- 2A; and
2. 20% of the total eligible input credit, available in FORM GSTR 2A.

Please note that Section 43A* of the Central Goods and Services tax Act, 2017 (‘the CGST Act, 2017’) provides the procedure for furnishing return and availing ITC (effective date yet to be notified). As per the clause (4) of the said section the maximum ITC in respect of outward supplies not furnished by supplier in their FORM GSTR-1 may not exceed 20% of the ITC available on the basis of invoices/ debit notes available in FORM GSTR 2A. The relevant provision reads as under:

“(4) The procedure for availing input tax credit in respect of outward supplies not furnished under sub-section (3) shall be such as may be prescribed, and such procedure may include the maximum amount of the input tax credit which can be so availed, not exceeding twenty per cent. of the input tax credit available, on the basis of details furnished by the suppliers under the said sub-section.”

* It is to be noted that Section 43A was inserted vide Central Goods and Services Tax (Amendment) Act, 2018.

In view of the same, it can be inferred that the provision of Rule 36(4) of the CGST Rules, 2017 is prescribed under Section 43A of the CGST Act, 2017, for which the effective date is not yet notified. Hence, in my view the provision of capping 20% ITC on invoices not furnished by supplier in their FORM GSTR-1 would be effective from the effective date of applicability of section 43A of the CGST Act, 2017. Thus, a separate notification should be issued by the Government for providing its effectiveness. Also, please note that the capping of 20% is a part of the new return mechanism, which is scheduled from April, 2020 onwards.

Alternatively, a view can be taken that Rule 36(4) of the CGST Rules, 2017 has been prescribed under Section 16 of the CGST Act, 2017 and is already effective from the date 09 October, 2019 viz. date of issue of Notification No. 49/2019 – Central tax. In lack of clarity on the effective date of the said Rule, a clarification is expected to be issued from the Government thereby clarifying the effective date of the applicability of Rule 36(4) of the CGST Rules, 2017

We would discuss the said rule in detail with illustrations but before that let’s analyse the relevant provisions in respect to ITC availment prior to this prescribed rule:

Provisions prior to Rule of 20% cap on ITC against invoices not uploaded by Supplier

In terms of Section 16 of the Central Goods and Services tax Act, 2017 (‘the CGST Act, 2017’) a registered person would be eligible to take ITC wherein the following conditions are satisfied (Please refer note 1) :

• It has a valid tax invoice;
• Tax has been paid on such invoice.
• Return is filed under Section 39 of the CGST Act, 2017.

Note:1 There are also specific conditions of ITC availment mentioned in the aforesaid section and prescribed rules, but these are not being discussed in the article.

Initially, the idea of availing ITC to a registered person was on the basis of matching concept. Upon filing of Form GSTR-1 by the supplier, the details of invoices/ debit notes would be made available to the recipient in the Form GSTR-2A as inward supplies. Further, after necessary modifications and acceptance in Form GSTR-2, the ITC would be credited to the electronic credit ledger of the recipient on provisional basis. The modifications done by the recipient would be made available to the supplier in Form GSTR-1A for his acceptance. Final ITC would be available upon filing of GSTR-3 along with payment of GST by the supplier.

In terms of Rule 36(2) of the CGST Rules, 2017 a registered person would be eligible to avail ITC only in respect to details furnished in FORM GSTR-2. Hence, please note that details in FORM GSTR-2 is furnished by a registered person on the basis of details contained in its FORM GSTR-2A i.e. details furnished the supplier in their FORM GSTR-1. Accordingly, ITC credit is available to a registered person. The relevant provision is mentioned below, for your ease of reference:

As per Rule 36(2) of the CGST Rules, 2017 “Input tax credit shall be availed by a registered person only if all the applicable particulars as specified in the provisions of Chapter VI are contained in the said document, and the relevant information, as contained in the said document, is furnished in FORM GSTR-2 by such person:.”

As per Rule 60 of the CGST Rules, 2017 “Form and manner of furnishing details of inward supplies.-(1) Every registered person, other than a person referred to in section 14 of the Integrated Goods and Services Tax Act, 2017, required to furnish the details of inward supplies of goods or services or both received during a tax period under sub-section (2) of section 38 shall, on the basis of details contained in Part A, Part Band Part C of FORM GSTR-2A, prepare such details as specified in sub-section (1) of the said section and furnish the same in FORM GSTR-2 electronically through the common portal, either directly or from a Facilitation Centre notified by the Commissioner, after including therein details of such other inward supplies, if any, required to be furnished under sub-section (2) of section 38.”

In this regard, please note that filing of FORM GSTR 2 and FORM GSTR 3 is currently suspended vide Notification No. 44/2018 – Central Tax dated 10 September, 2018 (as amended from time to time).

In view of the aforementioned discussion, please find below the relevant conditions of availing ITC:

• The registered person has a valid tax invoice;
• Tax has been paid on such invoice;
• Applicable GST return has been filed;
• Details available in FORM GSTR 2A.

In this regard, please note that since filing of FORM GSTR-2 and FORM GSTR 3 is currently suspended hence the condition to avail credit on the basis of FORM GSTR 2A should not be the criteria for availing of ITC. Further, in the case of Bharti Telemedia Ltd. Vs. Union Of India & Ors. [W.P.(C) 6293/2019] a Writ petition is issued by Delhi High Court (order dated 29 May, 2019) thereby challenging the provision of ITC denial to recipient for default on part of supplier in filing their GST returns.

Accordingly, even in case where invoices are not furnished by suppliers in their GSTR-1, a view can be taken that the claim of ITC cannot be denied to a registered person (provided other conditions of ITC availment is satisfied).

Further, CBIC has also provided vide Circular No. 59/33/2018-GST dated 4 September, 2018 that there could be a situation where ITC availed in respect to invoices are not available in GSTR 2A on account of delayed or not filing of GSTR-1 by the Suppliers. In such cases, the proper officer may call the hard copy of the invoices and examine the same, if required, for claim of refund.

In view of the aforementioned discussions, in my view, a registered person can avail full ITC in respect to eligible input invoices, physically available to him, filed in its FORM GSTR 3B.

For illustration:

Particulars	ITC as per GSTR 3B	ITC as per GSTR 2A	ITC for which Physical invoices not available	Total Eligible ITC
Situation -1	100	80	30	70 (100-30)
Situation -2	150	120	0	150 (150-0)

Provisions post to applicability of Rule of 20% cap on ITC against invoices not uploaded by Supplier

As earlier discussed, please note that post applicability of Rule 36(4) of the CGST Rules, 2017 a registered person would be eligible to avail ITC only to the extent of 20% of the total eligible ITC as appearing in its GSTR 2A against invoices not appearing in its FORM GSTR 2A. Please note that the said rule does not provides the periodicity of undertaking the activity of reconciliation of ITC as per books of accounts and FORM GSTR 2A. Hence, in my view, once the said rule is effective, the condition prescribed in that said rule would require to be fulfilled by a registered person at any given point in time.

Further, in my view, the activity of reconciliation of ITC as per books of accounts and FORM GSTR 2A should be undertaken on monthly basis. The monthly activity would ensure that there are no implications of interest/ penalty on account of excess ITC that may be utilized or availed in any month prior to undertaking quarterly/half yearly reconciliation as per books of accounts and FORM GSTR 2A. For example, in the month of April 2020, eligible ITC has per books of accounts is INR 100 and eligible ITC as per FORM GSTR 2A is 60. In the instant case, as per the 20% ITC capping rule, a registered person would be eligible to avail ITC of INR 72/- in its GSTR 3B for the month of April 2020. In this regard, wherein full ITC is taken as per its books of accounts viz INR 100/- in the month of April 2020 and the ITC reconciliation activity is undertaken on quarterly basis on June 2020 then there may be exposure to unnecessary payment of interest/ penalty on account of excess ITC availed/ utilized of INR 28/- (INR 100- INR 72) in the month of April 2020.

However, referring to the case of M/s. Commercial Steel Engineering v. State of Bihar, [2019-VIL-348-PAT], the Patna High Court has held that ITC availed but not utilized for payment of tax does not invite any penal consequences under Section 73 of the CGST Act, 2017. Hence, a view can be taken that where ITC has not been utilized, though availed, there may not be any interest/ penalty implications. Considering the same, wherein a registered person who generally has always excess accumulated ITC in comparison to its output tax liability, the activity of reconciliation of ITC as per books of accounts and FORM GSTR 2A may be deferred and undertaken on quarterly or half yearly basis.

Now, in respect to the 20% capping rule, please find below the illustration which may be undertaken for reconciliation of ITC as per books of accounts and FORM GSTR 2A:

Situation	Month for which GSTR 3B is filed	Total ITC as per Books (Eligible + Ineligible)	Eligible ITC as per books	Ineligible ITC as per books	Total ITC as per GSTR 2A (Eligible + Ineligible)	Eligible ITC as per GSTR 2A	Ineligible ITC as per GSTR 2A	Eligible ITC to be taken in FORM GSTR 3B
1	April 2020	100 (100+0)	100	0	60 (60+0)	60	0	72 (60+20% of 60)
2	April 2020	170 (150+20)	150	20	100 (80+20)	80	20	96 (80+ 20% of 80)
3	April 2020	200 (180+20)	180	20	170 (160+10)	160	10	180 (160+ 20% of 160, maximum of eligible ITC as per books) (Refer Note 2)

Note 2: In any case and at any point in time, eligible ITC to be taken in FORM GSTR 3B would not exceed the eligible ITC as per books of accounts.

In view of the aforementioned illustration, please note that ineligible ITC as per from GSTR 2A has no relevance in calculating the cap of 20% of eligible ITC.

Further, please find below the reconciliation of eligible ITC as per books of accounts and GSTR 2A for the next month, in respect to aforementioned illustration:

Situation	Month for which GSTR 3B is filed	Eligible ITC as per Books (May 2020)	Total eligible ITC as per Books [cumulative of May and April (invoices not found in GSTR 2A but available in purchase register)]	Eligible ITC as per GSTR 2A (May 2020)	Updated incremental FORM  GSTR 2A for the Month April 2020 viz invoices uploaded by supplier in May 2020 pertaining to April 2020	Total eligible ITC as per GSTR 2A [cumulative GSTR 2A of  May 2020 and  updated incremental ITC as per FORM GSTR 2A of April 2020]	Eligible ITC to be taken in FORM GSTR 3B
1	May 2020	100	140 (100+40)	50	40 (100-60)	90 (50+40)	108 (90+20% of 90)
2	May 2020	150	220 (150+70)	100	70 (150-80)	170 (100+70)	204 (170+ 20% of 170)
3	May 2020	180	200 (180+20)	170	20 (180-160)	190 (170+20)	200 (190+ 20% of 190, maximum of cumulative eligible ITC as per books) (Refer Note 3)

Note 3: In any case and at any point in time, ITC to be taken in FORM GSTR 3B would not exceed the eligible ITC as per books of accounts.

Further, during undertaking the monthly reconciliation of ITC as per Books of accounts and ITC as per FORM GSTR 2A, in order to maximize the amount of availment of ITC against capping of 20%, purchase register may be taken up to the period when the reconciliation activity is undertaken. This would ensure that the invoices which are recorded by a registered person in its books of accounts post to the end of the month for which reconciliation activity is performed but are dated on the previous month, are also included in the criteria of 20% of eligible ITC. For illustration:

Situations	Period for which GSTR 3B is filed	Invoice date	Recorded in purchase register	Whether invoice available in FORM GSTR 2A of April 2020	Whether would be covered in 20% of eligible ITC  in GSTR 2A
When ITC  reconciliation is undertaken on the basis of purchase register from 01 April 2020 to 30 April 2020	April 2020	15 April 2020	17 April 2020	√	√
		28 April 2020	05 May 2020	√	x
When ITC  reconciliation is undertaken on the basis of purchase register from 01 April 2020 to 12 May 2020	April 2020	15 April 2020	17 April 2020	√	√
		28 April 2020	02 May 2020	√	√

In respect to the unreconciled ITC as per books of accounts and FORM GSTR 2A, now there would be a requirement of regular follow up with the suppliers for uploading the invoices with the due date in regard to invoices which are available in purchase register but not uploaded by supplier in their respective GSTR-1.

ITC outside the purview of Rule 36(4) of the CGST Rules, 2017

The aforesaid said rule prescribes that “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..”. In view of the same, the ITC available to a registered person which are not based on invoices/debit note uploaded by supplier would be available to him without the restriction prescribed under Rule 36(4) of the CGST Rule, 2017. The following can be such ITC available to a registered person:

• ITC on import of goods basis bill of entry;
• ITC available on services under reverse charge mechanism on the basis of self-invoice under Section 31(3)(f) of the CGST Act, 2017;
• ITC re-availed post making payment to supplier after 180 days of date of invoice;
• ITC availed post calculating final reversal of credit under Rule 42(2) of the CGST Rules, 2017.

The views expressed herein are personal of the author.