Rule 88D: Bridging ITC Discrepancies Between GSTR-3B and GSTR-2B

Rule 88D has ushered in a transformative paradigm shift in the realm of Goods and Services Tax (GST) compliance. This rule addresses the often perplexing issue of discrepancies between Input Tax Credit (ITC) availed in GSTR-3B and the credit reported in GSTR-2B for specific periods. In this article, we delve deep into the historical context of ITC reconciliation, the evolution of Rule 36(4) of the CGST Rules, and the comprehensive implications of the new Rule 88D.

Historical Context: A Glance at Rule 36(4) of CGST Rules and its Evolutions

1. Initial Days: Self-Declaration Era Prior to the implementation of Rule 36(4) of the Central Goods and Services Tax (CGST) Rules, which lasted until 9 October 2019, taxpayers determined their input tax credit (ITC) on a self-declaration basis. This provided flexibility but lacked strict verification mechanisms.

2. Turning Point: Insertion of Rule 36(4) This landscape underwent a transformative shift post 9 October 2019. The CGST Rules were augmented with Rule 36(4), as per Notification No. 49/2019-Central Tax. The spotlight was now on a robust mechanism: ITC claims had to mirror the credit outlined in GSTR-2A. As a leeway, taxpayers were permitted to claim an extra 20% credit on invoices that didn’t find a match.

3. Tweaking the Rules: Further Amendments However, this 20% buffer didn’t last long. An ensuing revision via Notification No 75/2019 Central Tax dated 26 December 2019 dictated that from the onset of 2020 until its close, the permissible threshold for unmatched invoice credit was sliced to 10%. The tightening didn’t stop there. As per Notification No 94/2020-Central Tax dated 22 December 2020, this threshold faced a further reduction to 5% for the entire calendar year of 2021.

4. Impacts on Taxpayers: A Mixed Bag On the bright side, Rule 36(4) tossed a lifeline to taxpayers by allowing additional credit on unmatched invoices. This cushion, albeit shrinking over time, provided some breathing room. On the flip side, it thrust upon taxpayers an augmented workload. Monthly compliance now demanded vigilant tracking of unmatched invoices. They had to keenly observe which invoices got reconciled in the subsequent months and how much of the buffer credit they’d already leveraged for those remaining unmatched.

Elucidation on Input Tax Credit Matching from April 2017 to December 2021

i. Pre-CBIC Clarification Era (April 2017 to March 2019): Until CBIC (Central Board of Indirect Taxes and Customs) spelled out its stance for the period spanning April 2017 to March 2019, taxpayers navigated their way using a press release dated 18 October 2018. This release indicated that mandatorily matching credit with GSTR-2A wasn’t necessary. The waters were clarified when CBIC introduced Circular No. 183/15/2022-GST dated 27 December 2022. This document delineated guidelines for addressing unmatched credit for the aforementioned period. It ushered in a dual mechanism: either self-certification or, based on the magnitude of unmatched credit, validation from professionals, notably Chartered Accountants.

ii. The Silent Phase and Ensuing Clarity (FY 2019-20 and April 2020 to December 2021): The previously discussed circular remained mum on credit matching for the fiscal year 2019-20 and the period stretching from April 2020 to December 2021. Given the void, CBIC felt the imperative to release another directive. Hence, Circular No. 193/05/2023- GST dated 17th July 2023 saw the light of day. Echoing its predecessor’s spirit, this document extended reprieve to taxpayers for unmatched credits claimed during this timeframe.

Fresh Alterations in CGST Act: Insertion of new clause in Section 16(2) of CGST Act, 2017

From 1st January 2022, the CGST Act’s Section 16(2) embraced clause ‘aa’. This indicates that GSTR-3B’s ITC is capped to the extent of invoices mirrored in the respective month’s GSTR-2B.

A Glimpse into Rule 88D of the CGST Rules

i. The Genesis of Rule 88D: The Central Board of Indirect Taxes and Customs (CBIC) ushered in a new era with the proclamation of Rule 88D, as conveyed through Notification No 38/2023- Central Tax on 4 August 2023.

ii. Core Provisions of the Rule: This rule becomes operative when there’s a mismatch between the Input Tax Credit (ITC) declared in GSTR-3B and the credit showcased in GSTR-2B for any given period. Depending on directives from the GST Council, an electronic intimation via Part A of Form DRC-01C is dispensed to the taxpayer in such circumstances. The onus then falls on the taxpayer to address this disparity. They have two clear options:

a. Remit the differential amount along with the applicable interest via DRC-03.

b. Articulate the reasons for the disparity in Part B of Form DRC-01C.

It’s crucial to note that the threshold, upon which this intimation would be triggered, remains under wraps for now.

iii. Consequences of Non-Compliance: The rule doesn’t shy away from penalties. If a taxpayer neither settles the intimated amount detailed in Part A of Form DRC-01C nor elucidates their stance within a window of 7 days in Part B, they will be served a notice under either Section 73 or 74 of the CGST Act, demanding the outstanding amount.

iv. An Addendum to Rule 59(6) – Clause (e): Complementing Rule 88D, there’s an augmentation in Rule 59(6) through the introduction of Clause (e). This clause underscores that any taxpayer, who remains passive, neither settling the excess ITC as indicated in Part A of Form DRC-01C nor offering an explanation in Part B of the same form, will be barred from submitting GSTR-1 for the ensuing tax period.

In essence, Rule 88D coupled with the new clause in Rule 59(6) fortifies the GST framework, ensuring taxpayers remain vigilant and discrepancies in ITC are promptly addressed.

Analyzing the Impact of Rule 88D of CGST Rules

i. Intensified Compliance Monitoring: The introduction of Rule 88D in the CGST Rules ushers in heightened scrutiny on the Input Tax Credit (ITC) reconciliation process. The earlier leniency and absence of a structured response system to discrepancies between GSTR-3B and GSTR-2A are now replaced with a systematic intimation and follow-up procedure.

ii. Streamlined Accountability Mechanism: Prior to the introduction of this rule, discrepancies in ITC were flagged through visual cues and pop-up warnings during the GSTR-3B filing process. With the advent of Rule 88D, these discrepancies now carry tangible consequences, making the taxpayers more accountable.

iii. Relevance of Timeframe: The rule places emphasis on the month in which the ITC is claimed, not on the month the supply is reported. This means that if an invoice is raised in June but credit is claimed in August, the taxpayer will need to be cautious. It requires businesses to have a meticulous ITC management system to ensure there’s alignment between claimed ITC and reflected credits in GSTR-2B.

iv. Implications for Specific Accounting Practices: Businesses following a payment-based ITC availment approach might find themselves frequently receiving intimations under Part A of DRC-01C. The rule doesn’t inherently distinguish between genuine procedural delays in claiming credits and intentional misreporting. This might necessitate a re-evaluation of such accounting practices.

v. Prompt Actions Are Crucial: The 7-day window for taxpayers to act post receiving the intimation is concise. Businesses need to ensure they have efficient systems in place to address discrepancies promptly to avert statutory notices and the cascading ramifications like the inability to file GSTR-1 for the succeeding period.

v . Potential Operational Challenges: Regularly tracking the ITC discrepancies, especially for larger corporations with a vast number of transactions, can be an operational challenge. Firms may need to invest in more sophisticated software solutions or dedicated compliance teams to manage this efficiently.

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Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement