CA Madhukar N Hiregange &
CA Akshay M Hiregange

Input Tax Credit (ITC) matching – GSTN- not ready- A thorny issue for the department and the assessees. It has been 3 years and 3 months since the inception of GST, one would expect the early teething problems were overcome, and the new radical indirect tax regime would be up and running! Although, due to various factors, including the recent pandemic, we are seeing continuous amendments, delays in implementation and lack of a dependable infrastructure. Rule 36(4), i.e. the ITC matching and claim based on vendor GSTR filings is one such insertion into the law which is creating more harm than good. In this article, we have analysed the impact, practical suggestions, and also touched upon the validity of Rule 36(4) in GST law.

ITC reconciliation as per Rule 36(4)

In terms of Section 16 read with Rule 36(4) inserted w.e.f. 9th October 2019, ITC can only be claimed by an assessee based on the outward supply details (tax invoice, CN/DN) uploaded by the vendor in their GSTR-1. To provide some room for filing errors/delay in filing, etc. an ad-hoc additional 20% (upto December 2019)/10% (from January 2020 onwards) limit was provided. It has further been reduced to 5% (from January 2021 onwards).

Note: The ITC rule restriction does not apply to ITC on – Import of goods, Input Service Distributor invoices and under reverse charge mechanism.

Various law pronouncements to the topic have been listed below:

A. Introduction of Section 43A – CGST Amendment Act 2018 w.e.f 01.02.2019

B. Applicability of Section 43A kept on hold – NN. 02/2019-CT dt. 29.01.2019

C. Introduction of Rule 36(4) – NN. 49/2019-CT dt. 09.10.2019

D. Clarification for Rule 36(4) – Circular 123/42/2019 dt. 11.11.2019

E. 20% to 10% ad-hoc ITC amendment – NN. 75/2019 – CT dt. 26.12.2019

F. Conditional deferment: Feb – Aug 2020 – NN. 30/2020 dt. 03.04.2020

G. Clarification for ITC claim: Feb – Sept 2020 Circular 142/12/2020 dt. 09.10.2020

H. 10% to 5% ad-hoc ITC amendment – NN. 94/2020 dt. 23/12/2020

Simple Illustration:

Particulars 1st month 2nd Month 3rd Month
Eligible ITC as per Books 140 100 60
ITC carried forward 30 (140-100-10) 20 (30-10)
Eligible ITC as per GSTR-2A* 100 100 100
Maximum ITC available u/r 36(4) 110 (100*110% as ITC as per books is higher) 110 (10% ad-hoc claimed due to books ITC c/f) 80 (books are less than 110%)
Total ITC for 3 months as per books 300
Total ITC for 3 months as per GSTR-2A 300
* Eligible ITC as per GSTR 2A – Management would require to perform eligibility test as per Section 16 & 17 of CGST Act upon GSTR 2A downloads.

Impact – Credit not reflecting in GSTR 2A

A. Possible reasons for differences –

  • B2B updated instead as B2C transaction in GSTR 1
  • Incorrect GSTIN updated in GSTR 1
  • Delay in filing GSTR 1 (for the month/for the transaction).
  • Quarterly filers GSTR 1 reflects in GSTR 2A on a quarterly basis. (credit could be eligible on monthly basis)
  • Data entry errors – incorrect invoice number or date, taxable value/taxes.

B. Communications/notices from the department requiring reasons for mis-match between ITC claimed in GSTR 3B against ITC in GSTR 2A. (e-mail/printer letter with DIN). The point in A) above where applicable could be shared in the reply.

C. Interest being demanded at 24% p.a. as per Section 50(3).

D. Blockage of electronic credit ledger – Rule 86A had been introduced in December 2019, wherein the Department now has the powers to block the amounts lying in electronic credit ledger subject to underlying conditions. If not, recovery proceedings also may be initiated. Although, principles of natural justice are expected to be followed.

E. The above leads to a business process impact necessitating change such as cash flow management, revision of payment terms/contracts, increase in vendor relation management, etc.

Practical Issues & Changes

Due to the hasty introduction of the Rule, it led to several practical issues which are not resolved or partially resolved till date. Some of the important ones are highlighted below:

A. Section 43A not notified – Section 43A remains un-notified till date although it was brought in through the GST law in February 2019. Possibility of questioning validity of introducing Rule 36(4), instead of notifying Section 43A remains. [ However, it may be bought in retrospectively]

B. No clarity on quarterly return filers – The due date to file GSTR 1 for quarterly filers was after GSTR 3B for the said month, also the portal does not allow to upload the data on a monthly basis. This has only been partially resolved from October 2020 as the due date to file GSTR 1 for quarterly filers has been brought before the GSTR 3B due date.

C. Introduction and scrapping of New Returns (ANX-1,2 etc.) – The highly anticipated new GST returns, looked like it was expected to be implemented in 2020, which was an improved version of the present GST returns as it links the outward supply to tax payments and could assist in the ITC reconciliation as per Rule 36(4). Alas, the concept itself was scrapped completely in September 2020.

D. Introduction of GSTR 2B – Significant difference between GSTR 2B and GSTR 2A is that, GSTR 2B is not a dynamic report. Details uploaded by suppliers in GSTR 1 after due date dates would be considered in the forthcoming month. Therefore, GSTR 2B for a month would be constant after the due date. It would also indicate those invoices which are uploaded beyond the ITC claim time limit under “ITC not available”, although, there is no verification link to GSTR 3B ITC claimed. This has been introduced from July 2020 GST returns onwards.

E. Common GSTR 1 error – Vendor uploading invoice in B2C instead of B2B, or disclosing incorrect GSTIN in B2B are common errors. Assuming that vendor has also paid the taxes through GSTR 3B, whether such procedural errors can disallow credit eligibility for the recipient? In our view, the intention of the law is to enable credit to the recipient. Where the vendors provide declarations that tax on the invoices have been paid, credit must not be denied to the recipient.

F. ITC Claim based on GSTR 2A – There are rising cases where GST is being claimed solely on the basis of GSTR 2A without verification of credit eligibility u/s 16 & 17 of CGST Act. This could lead to serious consequences in the form of interest and penalty.

G. Applicability of 24% interest – As the provisions of Section 42 & 43 have not been enabled as yet (GSTR 2 & 3 deferred indefinitely), the applicability of Section 50(3) could be questioned entirely, therefore, the residual rate under Section 50(1) could be said to be applicable, i.e. 18% p.a. Also, it is important to note there is no interest on interest.

H. GSTR 1 is not tax payment return – Section 16(2)(c) – recipient must ensure tax charged on supply has been actually paid to the government. As GSTR 1 is not a tax payment return, but in fact is only a outward supply disclosure return, whether this process would help satisfy the ITC availment condition. If not, whether any assessee aggrieved by departmental notices on GSTR 2A mis-match can take shelter under the legal maxim – Lex non cogit impossibila (law does not compel a man to do that which he cannot possibly perform).

Practical Solutions – Compliance of Rule 36(4)

Other than the option to litigate the validity and question the practical compliance abilities for Rule 36(4), below are the suggestions to comply with Rule 36(4):

1. Freezing books of accounts – Ensuring back-dated entries are not passed. Use authorization levels for exceptional cases. (Ex: year-end audit entries)

2. Obtaining YTD (year-to-date) GSTR 2A – As the GSTR 2A is a dynamic report, ensure for the financial year, GSTR 2A is downloaded on a year to date basis. (Ex: For GSTR 2A Vs GSTR 3B of October 2020, download GSTR 2A from April to September 2020 again to avoid missed out entries.)

3. Tracking mechanism for delayed/non-filings – Maintain a master tracker on a vendor-invoice-period level to identify delays/non-filers.

4. Vendor management system – Develop a system to grade vendors, where payment terms are decided based on GST compliance and track record to hold back payment of GST portion to those who may be non-compliant. GST would only be paid for them on its confirmation entry in 2.

5. Software integration/use of 3rd party websites – Integrate GST software to books of accounts to enable GSTR 2A Vs ITC as per books reconciliation/utilize 3rd party transactions. Benefits – Reduces time, increases accuracy, also can identify possible reasons for mis-match.

6. Training to employees – Regular updation of GST law along with training on utilization of software is suggested.

Useful Court rulings

Kay Kay Industries – Hon’ble Supreme Court – Civil Appeal 7031 (2009) – Petitioner claimed MODVAT credit based on invoice, although, department contended that as the vendor has not discharged the liability, it was the responsibility of the recipient to ensure tax is paid to the government. Hon’ble Supreme Court upheld the Tribunal and High Court decision allowing the credit to the petitioner.

Alstom India Vs UOI – – Hon’ble Gujarat High Court – Special Civil Application 11031 (2013) – Petitioner succeeded in proving Constitutional invalidity on certain provisions laid down by DGFT which did not have legal grounds. Even though it is a writ petition ruling in Hight Court of another State, the decision can be relied on by the tax payers of other States on similar grounds.

Conclusion

The above deliberation throws light on the poorly constructed and implemented ITC reconciliation process. The legal validity of the new Rule itself is questionable. Unless the verification is enabled on the portal easily it is expected to be quashed. There are many other practical issues which are not yet addressed although it has been a year from the insertion of the Rule.

The Government is expected to implement the process appropriately, i.e. notify Section 43A, link disclosures to payment, and provide adequate infrastructure for implementation. The objective /goal of the rule was to curb the revenue leakage, but it has impacted business functioning and resulted in nuisance and also a lot of litigation possible consequently.

This article was published in Karnataka State Chartered Accounts Associations November 2020 newsletter.

Suggestions or feedback can be sent to madhukar@hiregange.com or akshay@hiregange.com

Author Bio

Qualification: CA in Practice
Company: Hiregange & Associates
Location: Bangalore, Karnataka, IN
Member Since: 01 Feb 2019 | Total Posts: 11
Qualified as Chartered Accountant in 2016. Currently, I am Partner Designate of Audit & Assistance in Hiregange and Associates (BLR). View Full Profile

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