Restriction to avail ‘ITC’ under Section 16(2)(aa) & Rule 36(4), if no GSTR-1 is filed by supplier

Input Tax Credit (ITC) forms the backbone of GST. It is imperative to streamline seamless flow of credit and any impending issues under ITC must be resolved at the earliest for making GST a Good and Simple Tax. Entire GST law is based upon seamless ITC but in practice it is totally diverse scenario. Any action of denying ITC would lead to cascading effect and kills the soul of GST. Though, availing of ITC forms one of the most critical activity for every business to settle its tax liability, however, claiming ITC is a mammoth task.

It is noted that a new clause (aa) to sub-section (2) of section 16 of The Central Goods and Services Tax, Act, 2017(“CGST Act, 2017”) is being inserted in Finance Bill, 2021. Please also note that these proposals will come into effect from a date to be notified later (NOT YET NOTIFIED). It is stated that Section 2 to 79 of Finance Act, 2021 shall come into force on the 1st day of April, 2021 and Section 99 to 114 of Finance Act, 2021 shall come into force on such date as the Central Government notify in this regard.

Input Tax Credit, text on white paper on chalkboard

Section 16 of CGST Act, 2017 contains four (4) sub-section out of which

  • Sub-section (1) talks about the ‘eligibility for taking ITC’.
  • Whereas sub-section (2) talks about ‘conditions which should be satisfied for taking ITC’.
  • Further, additional condition has been also put in sub-section (3) regarding ‘ITC not admissible if depreciation claimed on tax component’.
  • Moreover, sub-section (4) provides the ‘time limit for availing ITC’.

For conditions and restrictions, we have to see the provisions of Section 16(2) with Rule 36‘documentary requirements and conditions for claiming input tax credit’ under Chapter V INPUT TAX CREDIT of CGST Rules, 2017. With the amendment by Finance Act, 2021 a further new condition has been inserted is Section 16(2) of the CGST Act, 2017. Section 100 of the Finance Act, 2021 provides that-

“100. In section 16 of the Central Goods and Services Tax Act, in sub-section (2), after clause (a), the following clause shall be inserted, namely:––

(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;.

It is pertinent to mention that the aforesaid is one more condition regarding entitlement of ITC. It provides that ITC on invoice or debit note may be availed only when the details of such invoice or debit note have been furnished by the supplier in the statement of outward supplies (FORM GSTR-1) as specified in Section 37 of the CGST Act, 2017 and such details have been communicated to the recipient of such invoice or debit note. But the aforesaid proposal has not been notified yet.

It is also pertinent to note that pursuant to the Rule 59(3) of CGST Rules, 2017, the details of outward supplies furnished by the supplier shall be made available electronically to the concerned registered person (recipient) in PART A of FORM GSTR-2A, in FORM GSTR-4A and in FORM GSTR-6A through the common portal after the due date of filing of FORM GSTR-1.

Restriction on Availment of ITC under Rule 36(4):

It is very important to note herein that section 42 of CGST Act, 2017 specifies the mechanism for matching, reversal and reclaim of ITC wherein it was clearly stated the details of every inward supply furnished by a registered person shall be matched with the corresponding details of outward supply furnished by the supplier in such manner and within such time as may be prescribed. In support to that Rule 69 of CGST Rules, 2017-Matching of claim of ITC was framed to specify that the ITC shall be matched under Section 42 after the due date for furnishing the return in FORM GSTR-3.

Further, the first proviso to Rule 69 of CGST Rules, 2017 also states that if the time limit for furnishing FORM GSTR-1 specified under Section 37 and FORM GSTR-2 specified under Section 38 has been extended then the date of matching relating to claim of the input tax credit shall also be extended accordingly.

However, due to various numerous challenges in the implementation of FORM GSTR-2 & FORM GSTR-3, the Government has extended the time limits for filing FORM GSTR-2 and FORM GSTR-3 from time to time and later indefinitely. In absence of a requirement to file FORM GSTR-2 and FORM GSTR-3, the mechanism for ITC matching prescribed under section 42 read with Rule 69 will also get differed and become inoperative.

However, to come out from difficulties and challenges in mechanism for matching, reversal and reclaim of ITC, the Government had introduced a new section 43A vide CGST (Amendment) Act, 2018 dated 30-08-2018 (Effective date yet to be notified) specifying that

  • Overriding effect over section 16(2), section 37, section 38, section 41, section 42 and section 43;
  • In case of unmatched invoices ITC would be allowed maximum 20% of the eligible credit available;
  • Both supplier and recipient jointly and severally liable for the unpaid liabilities in this regard.

It is noted that this section was introduced to replace the original idea of FORM GSTR-1, FORM GSTR-2 & FORM GSTR-3. But assuming that the Government has dropped this idea and this new section is not notified yet.

Though section 43A of the CGST Act, 2017 was not made effective and notified, therefore, but a new Rule 36(4) was introduced to allow unmatched ITC with a maximum cap of 20% of matched ITC. It was observed by the department that some taxpayers take inflated or bogus ITC, even if proper tax invoices or debit notes in respect of input or input services are not available. To exercise control over the malpractice of availing bogus ITC by taxpayers, certain restrictions have been placed on availment of ITC. The Central Board of Indirect Taxes (“CBIT”) having power in Section 164 of the CGST Act, 2017, released a crucial Notification No. 49/2019 -Central Tax, dated 09th October, 2019 by which a new sub-rule (4) under Rule 36 of the CGST Rules, 2017, was inserted.

The Rule 36(4) in words of the law is-

“(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.”.

 For instance: –

SN. Particular Amount (in Rs.)
a. Eligible ITC appearing in FORM GSTR-2A

(on the basis of FORM GSTR-1 filed by the counterparty)

100
b. Eligible ITC not appearing in FORM GSTR-2A

(on the basis of not filed in FORM GSTR-1 by the counterparty)

40
c. Total eligible ITC on inward supplies (a+b) 140
Maximum Permissible ITC in FORM GSTR-3B on self-assessment basis (a x 120%) 120

Prior to the introduction of the above said notification entire eligible ITC of Rs. 150 can be availed by the taxpayer in FORM GSTR-3B return. However, with effect from 9th October 2019 out of eligible ITC not appearing in FORM GSTR-2A of Rs. 40, a sum of Rs. 20 can only be claimed in FORM GSTR-3B of the current month. Remaining ITC of Rs. 20 can be claimed in the subsequent months when the corresponding invoices are uploaded by the suppliers in FORM GSTR-1.

#Only for your reference please note that ITC once availed as per Section 16 (and Rules thereto) is credited to Electronic Credit ledger (‘ECL’) of the registered person and can be utilized for payment towards output tax as provided in Section 49 of the CGST Act, 2017.

Amendment in Rule 36(4) by Notification No. 94/2020-Central Tax dated 22nd December, 2020.

Later on, a new proviso has been inserted vide Notification No. 30/2020-Central Tax dated 03.04. 2020 w.e.f. 03.04.2020. In this regard it is important to note that Rule 36(4) of the CGST Rules, 2017 was recently amended vide Notification No. 94/2020-Central Tax dated December 22, 2020 w.e.f. January 01, 2021 to restrict the ITC to 5% in respect of invoices or debit notes not furnished by supplier in FORM GSTR-1.

After the amendment in Rule 36(4) by Notification No. 94/2020-Central Tax dated December 22, 2020, it may be read 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 furnished by the suppliers under sub-section (1) of section 37 in FORM GSTR-1 or using the invoice furnishing facility, shall not exceed 5% of the eligible credit available in respect of invoices or debits notes the details of which have been furnished by the suppliers under sub-section (1) of section 37 in FORM GSTR-1 or using the invoice furnishing facility.”

 Provided that the said condition shall apply cumulatively for the period February, March, April May, June, July and August, 2020 and the return in FORM GSTR-3B for the tax period September, 2020 shall be furnished with the cumulative adjustment of input tax credit for the said months in accordance with the condition above. “

Rule 36(4) of CGST Rules, 2017, now, restricts the credit relating to the invoices not uploaded by the suppliers in their FORM GSTR-1 to the extent of 5% [20% w.e.f. 09.10.2019 vide Notification No. 49/2019 (Central Tax) dated 09th October, 2019 and 10% w.e.f.01.01.2020 vide Notification No. 75/2019 Central Tax dated 26th December, 2019 and 5% w.e.f. 01.01.2021 vide Notification No. 94/2020-Central Tax dated 22nd December, 2020]. It provides that ITC can be here after claimed in the FORM GSTR-3B only to the extent of 105% of eligible ITC reflected in FORM GSTR-2A in aggregate.

Summarised Position before and after introduction of Rule 36(4) w.e.f. 09.10.2019 and with latest amendment vide Notification No. 94/2020-Central Tax dated 22nd December, 2020.

 ITC Mechanism before introduction of Rule 36(4) (before 09.10.2019):-

SN. Particular Amount (in Rs.)
No. of invoices 100
a. Eligible ITC appearing in FORM GSTR-2A

(on the basis of FORM GSTR-1 filed by the counterparty)

1,00,000
b. Ineligible ITC 20,000
c. Eligible ITC not appearing in FORM GSTR-2A

(on the basis of not filed in FORM GSTR-1 by the counterparty)

5,000
d. Total eligible ITC on inward supplies (a+c) 1,05,000
Maximum Permissible ITC in FORM GSTR-3B on self-assessment basis (a +c%) i.e. d 1,05,000

ITC Mechanism after introduction of Rule 36(4) (i.e. w.e.f. 09.10.2019 to 31.12.2019):-

SN. Particular Amount (in Rs.)
No. of invoices 100
a. Eligible ITC appearing in FORM GSTR-2A

(on the basis of GSTR-1 filed by the counterparty)

1,00,000
b. Ineligible ITC 20,000
c. Eligible ITC not appearing in FORM GSTR-2A

(on the basis of not filed in GSTR-1 by the counterparty)

6,000
d. Total eligible ITC on inward supplies (a+c) 1,06,000
Maximum Permissible ITC in FORM GSTR-3B on self-assessment basis (a x 20%) i.e. Rs. 20,000 or Rs. 6,000 whichever is lower, therefore, Rs. 1,00,000 +Rs. 6,000 = Rs. 1,06,000 1,06,000

ITC Mechanism after introduction of Rule 36(4) (i.e. w.e.f. 01.01.2020 to 31.12.2020):-

SN. Particular Amount (in Rs.)
No. of invoices 100
a. Eligible ITC appearing in FORM GSTR-2A

(on the basis of FORM GSTR-1 filed by the counterparty)

1,00,000
b. Ineligible ITC 20,000
c. Eligible ITC not appearing in FORM GSTR-2A

(on the basis of not filed in FORM GSTR-1 by the counterparty)

6,000
d. Total eligible ITC on inward supplies (a+c) 1,06,000
Maximum Permissible ITC in FORM GSTR-3B on self-assessment basis (a x 10%) i.e. Rs. 10,000 or Rs. 6,000 whichever is lower, therefore, Rs. 1,00,000 +Rs. 6,000 = Rs. 1,06,000 1,06,000

ITC Mechanism after introduction of Rule 36(4) (i.e. w.e.f. 01.01.2021):-

SN. Particular Amount (in Rs.)
No. of invoices 100
a. Eligible ITC appearing in FORM GSTR-2A

(on the basis of GSTR-1 filed by the counterparty)

1,00,000
b. Ineligible ITC 20,000
c. Eligible ITC not appearing in FORM GSTR-2A

(on the basis of not filed in FORM GSTR-1 by the counterparty)

6,000
d. Total eligible ITC on inward supplies (a+c) 1,06,000
Maximum Permissible ITC in FORM GSTR-3B on self-assessment basis (a x 10%) i.e. Rs. 5,000 or Rs. 6,000 whichever is lower, therefore, Rs. 1,00,000 +Rs. 5,000 = Rs. 1,05,000 1,05,000
ITC carried forward to the subsequent tax period subject to the requisite invoices uploaded by the suppler 1,000

Rule 36(4) of CGST Rules, 2017 is concerned with regard to restriction on the availment of ITC in cases where FORM GSTR-1 has not been uploaded by the suppliers under sub-section (1) of section 37. It is important to note that this newly inserted rule is a substantive condition to be fulfilled for the availment of ITC in addition to conditions prescribed under Section 16 of CGST Act, 2017.

Analysis: Now it is analysed that-

  • at present section 42 & 43 of CGST Act, 2017 which require the invoice matching concept have been kept in abeyance;
  • Moreover, new section 43A which overrides section 16(2), section 37, section 38, section 41, section 42 and section 43, is not yet notified;

Therefore, we can say that Rule 36(4) of CGST Rules, 2017 has not legal sanctity and is travelling beyond the parent statute which is impermissible. Now it is seeming that the aforesaid amendment by inserting a new clause (aa) to sub-section (2) of section 16, is only to provide statutory backing to much debated Rule 36(4) of the CGST Rules, 2017. More interestingly, new clause (aa) to sub-section (2) of section 16 is still not notified yet. Also, a question comes into mind that after notifying the section 16(2) which makes 100% restriction to avail ITC, if no FORM GSTR-1 is filed by the suppler, what will the position of Rule 36(4) of CGST Rules 2017?

Further, the provisions under Rule 36(4) do not make any distinguishment between the bonafide/genuine and non-bonafide/bogus cases and equally punishes which is violative of Article 14 of Constitution of India. Moreover, for the default of supplier, whether the recipient should be penalised? The benefit of ITC cannot be deprived to the recipient, if the recipient satisfactorily demonstrates that while purchasing, he has paid the tax to the supplier. If the supplier has not deposited the amount in full or a part thereof, it would be for the revenue to proceed against the supplier and shall not punish the recipient qua purchase for wrongdoing of supplier. The supplier is neither known to recipient nor is verifiable by the recipient except in case of related party transaction. Thereby, it can be said that such condition is impossible to perform and it is a known principle that the law does not compel a person to do something which he cannot possibly perform. The legal maxim reads as “lex non-cogit ad impossibilia” i.e. law does not compel a man to do which he cannot possibly perform. The Hon’ble Courts has adopted this principle and done away the requirement which is impossible to perform in peculiar facts & circumstances. Meaning thereby, it can be said that the condition, which is not possible to satisfy, need not be satisfied and shall be considered as deemed satisfied. Moreover, GST law is silent in case where the recipient has paid the tax to the supplier, but supplier did not deposit the same and recipient has been penalised for the default of supplier. Now what will be position of refund of ITC in case of supplier subsequently pays to the Government or recovered by the Government?

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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