Input Tax Credit is the core subject under GST law, the very objective of GST to provide seamless credit flow and neutralize cascading effects of taxes. Any restriction ITC will enhance transaction cost of the taxpayers and slow down of business of the taxpayers, consequently the restriction of ITC will defeat the very objective of GST implementation.

C.B.I. & C, vide its Notification No. 49/2019-Central Tax, dated 9th October 2019 as amended by Notification No. 75/2019-Central Tax, dated 26th December’2019 has been inserted Sub-rule (4) to Rule 36 restricting Input Tax Credit (ITC) availment by the taxpayers. The relevant inserted new sub-rule (4) is reproduced 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 10 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.”

With this notification No. 49/2019, there are many issues arises for its implementation thereby C.B.I & C, has issued Circular No. 123/42/2019-GST, dated 11-11-2019 [2019(30) G.S.T.L.C25] wherein clarified the ambiguity in the minds of  the taxpayers as well field formations.

By considering the notification and amended notification read with the said Circular the restriction in availment in Input Tax Credit in respect of invoices or debit notes for which details have not been uploaded by the suppliers beyond 10% of the eligible ITC the details of which have been uploaded by the suppliers. For the basic understanding an example with calculation is summarized in the below table:

Case Eligibility ITC as per books (Rs.) Eligible ITC reflected in GSTR-2A (Rs) Permissible ITC ( Eligibility ITC in GSTR 2A + 10% ), Rs. Actual ITC Which can be claimed. (Rs.)
I 8,00,000/- 6,00,000/- 6,60,000/- 6,60,000/-
II 8,00,000/- 7,00,000/- 7,70,000/- 7,70,000/-
III 8,00,000/- 7,50,000/- 8,25,000/- 8,00,000/- *

For the purpose of example Rs.8,00,000/- assumed as Eligibility ITC as per books of account of the taxpayers.

*Actual ITC which can be claimed cannot be exceeded the eligibility ITC as per books of account of the taxpayers.

As per Circular, this being new provision, the restriction is not imposed through the common portal and it is the responsibility of the taxpayer that credit is availed in terms of the said rule and therefore, the availment of restricted credit in terms of sub-rule (4) of rule 36 of the CGST Rules and shall be complied on self-assessment basis by the taxpayers.

Restriction applicable under rule 36(4):

> The restriction of 36(4) has made applicable only on the invoices / debit notes on which credit is availed after 09-10-2019.

> The restriction of availment of ITC has imposed only in respect of those invoices / debit notes, details of which are required to be uploaded by the suppliers under sub-section (1) of section 37 and which have not been uploaded.

> Taxpayers may avail full ITC in respect of IGST paid on import.

> Documents issued and tax paid under RCM.

> Input Tax credit can be availed against invoice received from ISD.

Method of Calculation 10% for restriction of ITC:

> The restriction imposed is not supplier wise.

> The credit available is linked to total eligible credit from all suppliers against all supplies whose details have been uploaded by the suppliers in the particular tax period.

> The calculation would be based on only those invoices for eligible ITC.

> Those invoices on which ITC is not available under section 17(5) would not be considered for calculating 10% of the eligible credit.

Admissible input tax credit for a particular tax period:

> Admissible input tax credit shall not exceed 10% of the eligible input tax credit available in respect of invoices or debit notes have been uploaded by the suppliers as on due date of fling of the tax returns in FORM GSTR-1 of the suppliers for the said tax .

> The restriction is to be calculated would be on consolidated basis for the given tax period and would not apply supplier-wise.

> The taxpayer have to ascertain the admissible ITC from his auto populated FORM GSTR-2A as available on the due date of filing of FORM GSTR-1 by the supplier under sub-section (1) of section 37.

The balance restricted ITC in a particular tax period can be availed by a registered person:

> The balance ITC may be claimed by the taxpayer in any of the succeeding months provided details of requisite invoices are uploaded by the suppliers.

> The registered person can claim proportionate ITC as and when details of some invoices are uploaded by the suppliers provided that credit on invoices, the details of which are not uploaded remains 10 per cent of the eligible input tax credit, the details of which are uploaded by the suppliers.

> Full ITC of balance amount may be availed by the taxpayers in respect of a tax period when the invoices are uploaded by the suppliers to the extent of eligible ITC.

> ITC restricted for missing invoices can be claimed in the subsequent tax period only in proportion to reflection of the missing invoices once these invoices uploaded by the supplier.

Enforcement of restriction of ITC:

As per Circular, the restriction shall be enforced on self-assessment basis. There is no automatic restriction on GSTN common portal under the current return filing system by the registered person i.e. GSTR-1 & GSTR-3B. Even though auto populated of GSTR-2A return available on common portal but cannot be comparison made between GSTR-3B ITC by the GSTN portal.

Eligibility Criteria of ITC:

The eligibility criteria for availing the input tax credit (ITC) and the conditions which are required to be fulfilled for the said purpose are elaborated in section 16 of the CGST Act 2017 which are summarized as under;-

“16. Eligibility and conditions for taking input tax credit. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

b) he has received the goods or services or both.

Explanation.—For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and

(d) he has furnished the return under section 39:  Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.

(3) Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961(43 of 1961) , the input tax credit on the said tax component shall not be allowed.

(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice pertains or furnishing of the relevant annual return, whichever is earlier.

From the above cited eligibility criteria of ITC, it is clear that all conditions for taking input tax credit as prescribed under Section 16 read with Rule 36 & 37, if the same has been complied by a registered person and the restriction of ITC as per sub-rule (4) of rule 36 of the CGST rules, 2017 (except the provisions under section 17 of the CGST Act,) is illegal.

Case Laws:

The very purpose of credit is to give benefit to the assessee and a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs should be available to the taxpayers. In this context Apex Court judgements in the case of Eicher Motors Ltd. v. Union of India- 1999 (106) E.L.T.3 (S.C.) in which the Supreme Court, in the context of Modvat credit, had observed as under :

“6. We may look at the matter from another angle. If on the inputs, the assessee had already paid the taxes on the basis that when the goods are utilized in the manufacture of further products as inputs thereto then the tax on these goods gets adjusted which are finished subsequently. Thus a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed. Therefore, it becomes clear that Section 37 of the Act does not enable the authorities concerned to make a rule which is impugned herein and, therefore, we may have no hesitation to hold that the Rule cannot be applied to the goods manufactured prior to 16-3-1995 on which duty had been paid and credit facility thereto has been availed of for the purpose of manufacture of further goods.”

Further, in the case of  Collector of Central Excise, Pune v. Dai Ichi Karkaria Ltd., reported in 1999(112) E.L.T. 353 (S.C.) in which the Supreme Court referring to the decision in case of Eicher Motors Limited (supra) had observed as under :

“17. It is clear from these Rules, as we read them, that a manufacturer obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable product immediately it makes the requisite declaration and obtains an acknowledgement thereof. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product. There is no provision in the Rules which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or if utilized, has to be paid for. We are here really concerned with credit that has been validly taken, and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product. The credit is, therefore, indefeasible. It should also be noted that there is no co-relation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The credit may be taken against the excise duty on a final product manufactured on the very day that it becomes available.”

In view of the cited Apex Court judgements, the restriction of ITC under sub-rule (4) of rule 36 of the CGST Rules, 2017 and denial of substantial benefit to a registered person is bad in law. The legitimate benefit of ITC available to a registered person cannot be denied for non-filing of returns by the suppliers. For the mistake of the suppliers, a registered person should not be punished. Thus sub-rule is clearly travelling beyond what has been prescribed by the Act. For that there is violation of Article 14 of the Constitution of India.

Vires of the circular:

It is a settled legal position that a circular is a clarificatory nature cannot travel beyond the provisions of the Act as well as the Rules made thereunder. Further the constitution Bench decision of Supreme Court in the case of CCE v. Ratan Melting & Wire Industries, reported in 2008 (231) wherein held that  “ Circulars and instructions issued by the Board are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for  the Court to direct that the circular should be given effect to and not the view expressed in a decision of this Court or the High Court. So far as the clarifications/circulars issued by the Central Government and of the State Government are concerned they represent merely their understanding of the statutory provisions. They are not binding upon the court. It is for the Court to declare what the particular provision of statute says and it is not for the Executive. Looked at from another angle, a circular which is contrary to the statutory provisions has really no existence in law.”

Thus, there is contradictory provision of sub-rule (4) of Rule 36 of the CGST Rules, 2017 restriction of 10% of the eligible ITC invoices not uploaded by the suppliers’ vis-à-vis eligibility criteria of ITC available to a registered person as provided under Section 16 of the CGST Act, 2017. If the suppliers failed to file return GSTR-1 in time and missing of invoices a registered supplier can upload / modify the invoices relating to a particular financial year till the due date of filing the return of September of the subsequent financial year or furnishing of Annual return, whichever is earlier. But new sub-rule (4) prescribing monthly restriction of missing invoices vis-à-vis eligibility ITC as per books of account of a registered person is going beyond the statutory provisions prescribed under section 16 of the CGST Act, the circular has to be held to be ultra vires the sub-rule.

Conclusion: In brief, the inserted new sub-rule (4) of Rule 36 of the CGST Rules, 2017 states that amount of eligible ITC shall be considered on the due date of filing of the return in FORM GSTR-1 of the suppliers for the given tax period i.e. monthly compliance and restriction of 10% of the eligible credit available in respect of invoices or debit notes. In case of a registered person filing return GSTR-1 for quarterly filers would not be monthly compliance and ITC would hence not be considered as eligible ITC for computing the permissible ITC. The circular is silent on this aspect by which quarterly return filers can be fully availed ITC without following the restriction provision of sub-rule (4) of Rule 36 of the CGST Rules, 2017 and the same in the case of ISD invoices issued by a centralised accounting at H.O, for distribution of credit to the branches. This is an unequal principle may not be a fruitful tax mechanism under GST. It is a complicated compliance may leads to litigations. Further, It is now observed that filed formations have started issuing intimation in FORM GST DRC-01A as per Rule 142(1A) of the CGST Rules, 2017 read with Section 73 (5) / Section 74(5) of the CGST Act, 2017 before service of notice to a registered person and to initiate recovery proceeding of irregular availment of ITC by a registered person. The Government should reconsider the complicated procedures as prescribed in terms of inserted new-sub rule (4) of Rule 36 of the CGST Rules, 2017, so that litigation on this account can be avoided in the GST regime. Since the Government already have announced various relaxation for filing of returns and payment of taxes on account of COVID-19. Similarly, in view of COVID-19 pandemic, the 10% credit restriction on invoices not shown in GSTR-2A has been temporarily suspended upto 31’st August’2020.

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