Summary of Important GST Changes Applicable From 01.01.2021

Background

We have certainly witnessed serious frauds under GST since the implementation mainly due to fake invoicing. Of course we cannot paint all the frauds with the same brush but largely it has to do with the seeking of the undue benefit at the cost of the exchequer. Hence on one side, there is a need to improve the system as well as the administration to check the frauds. However on the other side, one must be very conscious while considering a path, which gives abundant power to bring a halt to the business merely on some anomalies not in the nature of fraud, without instilling enough checks and balances in the system.

Far-reaching amendments have been made in the CGST Rules, 2017 vide Notification No. 94/2020-Central Tax with the purported aim to tackle the menace of fake invoicing. Wide powers have been granted to suspend the registrations (which will lead to the complete halt of the business) and restrict the availment of ITC for the invoices not furnished by the vendors (beyond the tolerance of 5%). The filing of GSTR 1 shall be suspended on failure to file GSTR 3B for the past two tax periods for general category of taxpayers. The travel time (i.e. validity of E-way bill) have been reduced by 50%. Also new rule (subject to certain exceptions) mandating compulsory payment of tax of at least 1% by cash (even though sufficient balance of ITC is available) has been introduced. Biometric checks and the power to visit the premises before granting the registration has been introduced. All of these changes have been made as stated earlier to tackle the menace of fake invoicing. However, all the taxpayers must now take extreme care to avoid breaching the rules as the said taxpayer will then have to face a complete halt to his business.

We are moving towards a regime where the supplier has to ensure the compliance at the end of the vendors for it to be in a position to claim the ITC of the tax charged.

We must also state that CBIC on their Twitter handle has put out a release titled as “Myths vs. Facts” clarifying that the newly inserted harsh provisions shall be invoked only after due caution and the data based on sophisticated systems.  It is earnestly hoped that the action of the department lives up to the said spirit. Otherwise Courts of this country are going to seriously look at the arbitrariness or the high handedness.

Also certain amendments made vide Finance Act, 2020 have been made applicable from 01.01.2021. Please read on the summary of the changes:

Summary of GST Amendments vide Notification No. 94/2020-Central Tax applicable from 01.01.2021

I. ITC related changes – Capping of ITC availment for missed invoices at 5%

Rule 36(4) has been amended to the effect that the registered person is restricted from availing the ITC in excess of the 5% (earlier it was 10%) of the eligible ITC for which the concerned suppliers have furnished the invoices. Readers are advised to peruse the attached sample calculation sheet to understand the implications. Said 5% restriction shall come into effect from 01.01.2021 and hence the same shall apply to even the ITC availed for December 2020.

II. Tax payment related changes – compulsory payment of tax of at least 1% by cash (subject to exceptions)

New Rule 86B has introduced restrictions on the use of amount of ITC available in electronic credit ledger. As per the said Rule, a registered taxpayer (where the value of taxable supply other than exempt supply and zero-rated supply exceeds INR 50 lakhs/month) cannot discharge his liability in excess of 99% by utilizing the ITC. In other words, such taxpayer shall be required to discharge at least 1% of the liability only by way of cash. However the rule provides for the following exceptions (wherein the entire liability can be discharged by utilizing the ITC):

(a) the said person or the proprietor or karta or the managing director or any of its two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees, as the case may be, have paid more than INR 1 lakh as income tax in each of the last two financial years for which the time limit to file the return of income has expired; or

(b) the registered person has received a refund amount of more than INR 1 lakh in the preceding financial year on account of unutilised input tax credit on account of zero-rated supplies (exports + SEZ); or

(c) the registered person has received a refund amount of more than INR 1 lakh in the preceding financial year on account of unutilised input tax credit on account of inverted rate structure; or

(d) the registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability, applied cumulatively, upto the said month in the current financial year; or

(e) the registered person is – (i) Government Department; or (ii) a Public Sector Undertaking; or (iii)a local authority;or (iv)a statutory body.

Commissioner or an officer authorised by him in this behalf is granted the power to remove the said restriction after such verifications and such safeguards as he may deem fit. Referred provisions shall come into effect from 01.01.2021.

III. Suspension/cancellation of GST Registration

Rule 21 is amended to provide that the registration of a person can be suspended in the following additional situations:

(a) avails input tax credit in violation of the provisions of section 16 of the Act or the rules made thereunder; or

(b) furnishes the details of outward supplies in FORM GSTR-1 for one or more tax periods which is in excess of the outward supplies declared by him in GSTR 3B for the said tax periods; or

(c) violates the provision of rule 86B

Wide powers have been granted by virtue of the said amendment to permit the suspension of registrations in cases where a person avails ITC in violation of the law (e.g. in excess of 5% of the eligible ITC reflected on the portal) or declare the outward supplies in GSTR 1 for one or more periods in excess of the outward supplies declared in GSTR 3B or fails to pay the tax of at least 1% by cash (Rule 86B).

Further Rule 21A has also been amended to permit the officer to suspend the registration without affording the said person a reasonable opportunity of being heard. Hence it is only after the suspension of the registration that an opportunity will be afforded to the concerned person to submit his reply and seek the revocation of the suspension. It may also be noted that the person in question cannot make any taxable supplies or cannot generate E-way bills during the period of suspension. Hence very harsh provisions have been introduced which may lead to the serious issues at the end of genuine taxpayers on account of bona fide errors (as there are several genuine situations where anomalies may occur).

Further new sub-rule (2A) has been inserted in Rule 21A to permit the suspension of registration in situations where the comparison of data between GSTR 1 of the person in question and GSTR 1 of the vendors of such person show “significant differences or anomalies indicating contravention of the provisions of the Act or the rules made thereunder”. Again the subjective language used without affording an opportunity to the taxpayer (before suspending the registration) to explain the anomalies is harsh.

Taxpayers therefore are expected to take extreme care in ensuring the compliance not only of himself but also of its vendors to avoid the rigours of the given provisions.

Further, no refund shall be granted to the taxpayer whose registration has been suspended.

If the registration is suspended, the officer shall send a communication on the portal or by email seeking the explanation for the anomalies which needs to be replied within 30 days. The suspension can be revoked only if the officer deems fit. In other words, the suspension will lead to cancellation if the officer is not satisfied with the justifications.

IV. New GST Registration

Rule 8 and 9 have been amended to provide for the biometric verification (Aadhaar authentication and taking photograph or taking biometric information, photograph and verification of such other KYC documents) for the applications for new registration. Also the period for granting the registration has been increased from 3 days to 7 days. However in cases where a person fails to undertake the said biometric verification or where the proper officer, with the approval of an officer authorised by the Commissioner not below the rank of Assistant Commissioner, deems it fit to carry out physical verification of places of business, the registration shall be granted within a period of 30 days instead of the normal 7 days. Similar process will apply for additional place of business.

V. Suspension of the filing of GSTR 1

Rule 59 has been amended to NOT permit the taxpayer to file GSTR 1 if,

(a) he has not furnished the return in FORM GSTR-3B for the preceding two months (for taxpayer filing monthly returns);

(b) he has not furnished the return in FORM GSTR-3B for preceding tax period (for taxpayer filing quarterly returns)

(c) he is required to discharge the tax liability of at least 1% by cash (see the discussion on Rule 86B) and he has not furnished the return in FORM GSTR-3B for preceding tax period (instead of two months under (a)).

VI. E-way bill – Available travel time curtailed by 50%

Rule 138(10) has been amended w.e.f. 01.01.2021 to curtail the available travel time by 50%. As an illustration, let us say that a dispatch to the destination (located at a distance of 550 kms) has taken place on 01.01.2021. As per the existing rule, the validity of the E-way bill generated on 01.01.2021 would have expired on 07.01.2021 (i.e. one day for 100 km starting from the midnight of the generation of the E-way bill). Now as per the amendment, the same will expire on 04.01.2021 and hence the goods must reach the destination within the said time frame. Alternatively, an extension can be sought (within the prescribed time), but difficult to get, for special reasons if the vehicle has not been able to reach the destination within the validity of the E-way bill.

Provisions of Finance Act, 2020 related to GST Applicable From 01.01.2021 

Finance Act, 2020 had made certain amendments in the provisions of the Act. Now vide Notification No 92/2020-Central Tax dt. 22.12.2020, following amendments shall come into effect from 01.01.2021:

a. Composition Scheme under GST

Provisions of Sec. 10(2) of the CGST Act, 2017 have been amended to provide that a registered person seeking to pay the tax under composition scheme shall not be engaged in making any supply of even services which is not leviable to tax (over and above the goods not leviable to tax) or shall not be engaged in making any inter-state outward supplies of even services or shall not be engaged in making any supplies of even services through an electronic commerce operator who is required to collect TCS. Thus, in other words, the 10% permissible limit to even enable the supply of services for a composition supplier of goods shall not however permit the supply of services not leviable to tax, the inter-state supply of services as well as the supply of services through an E-commerce operator required to collect TCS. It may also be noted that the exempt supply of services provided by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount shall not be taken into account while reading the said restriction due to specific exclusion of the same by virtue of the third proviso to Sec. 10(1) of the CGST Act, 2017.

b. ITC qua the debit note

It may be noted that the time limit to avail ITC with respect to the tax charged on the debit note before the amendment u/s 16(4) of the CGST Act, 2017 is also linked to the invoice date and not the date of the debit note. As an example, if the invoice is of FY 2017-18, even if the debit note is issued in FY 2019-20 (e.g. for levy of interest on delayed payment by the customer), the ITC with respect to the said debit note cannot be claimed for the reason that Sec. 16(4) provides for the time limit for claiming the ITC pertaining to the said debit note with reference to the invoice date and as the invoice is for FY 2017-18, the time limit to claim ITC even with respect to the debit note linked with the invoice has expired in March, 2019 and as the debit note was issued thereafter ITC cannot be claimed. Said lacuna is amended by omitting the words “invoice relating to such” and hence the time limit for availing ITC with respect to the debit note would be linked with the date of debit note and not the date of invoice.

c. Cancellation of voluntary registration

An amendment has been made u/s 29(1) of the CGST Act, 2017 to provide that even a registered person who has obtained the registration voluntarily can opt for cancellation if such person is otherwise not required to be registered mandatorily u/s 22 (on crossing the threshold) or Sec. 24 (compulsory registration in certain cases).

d. Extension for making revocation application

Sec. 30(1) of the CGST Act, 2017 has been amended to provide that on sufficient cause, the Additional/Joint Commissioner can extend the period for making the revocation application by 30 more days and the Commissioner can extend even further by 30 more days. In other words a condonation for late filing of the revocation application can be sought up to 60 days from the end of the normal 30 days period subject to sufficient cause.

e. Tax invoice for supply of services

Sec. 31(2) of the CGST Act, 2017 has been amended to grant the power to the Government specify, with respect to categories of services or supplies in respect of which a tax invoice shall be issued, the time limit within which it shall be issued and also the manner in which it shall be issued.

f. TDS Certificate

The procedural part contained in Sec. 51 dealing with the issuance of the TDS certificate and the consequences on certain failures is now to be dealt by way of a delegated legislation (viz. Rules) and hence the concerned provisions contained in the Act are omitted.

g. Beneficiaries of fake invoicing

New sub-section (1A) is introduced in Sec. 122 wherein it has been proposed that a person who retains the benefit of following transactions: (i) supplies any goods or services or both without the issue of any invoice or issues an incorrect or false invoice with regard to any such supply; (ii) issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act or the rules made thereunder; (iii) takes or utilises input tax credit without actual receipt of goods or services or both either fully or partially, in contravention of the provisions of this Act or the rules made thereunder; (iv) takes or distributes input tax credit in contravention of section 20, or the rules made thereunder and at whose instance such transactions are conducted shall also be liable to the penalty of an amount equivalent to the tax evaded or input tax credit availed of or passed on. The need for the amendment stems from the fact that the actual beneficiaries of fraudulent issuance of invoices and availment of fake credits are different from the registered persons in whose name they are undertaken. Hence to nab the kingpin of such racquets, the penalty will also be imposed on the kingpin who has retained the benefit of such fraudulent transactions and at whose instance they were made.

Parallel to the provisions to impose penalty on the kingpin of fake credit racquets, an amendment has also been made u/s 132 to punish such kingpin by way of imprisonment and fine. Therefore the person who even causes to commit and retains the benefit of the given offences would be liable to prosecution. It may also be noted that such offences of fake invoicing/credits are cognizable and non-bailable if the evasion amount exceeds INR 5 crores.

h. Schedule II

Schedule II is merely a classification schedule and does not determine whether a transaction is a supply or not. Paragraph 4 of the said Schedule provides that the transfer or disposal of goods forming part of the assets of a business shall be considered as a supply of goods even if such transfer or disposal is for a consideration or not. Similarly where the goods held for the purpose of business are put to any private use or made available to any person for use other than business, then such usage or making available of such goods would be treated as supply of services even if such usage or making available is without a consideration. With this background, it may be noted that Sec. 7(1)(c) of the CGST Act, 2017 only allows the activities specified in Schedule I as supply even if the same are made without a consideration. Hence unless the transaction in question is not covered by Schedule I, Schedule II by way of the above-referred paragraph 4 cannot deem it as a supply if it is made without a consideration. Therefore the said anomaly is corrected by way of a retrospective amendment effective from 01.07.2017 to the effect that the aspect of presence/absence of consideration will be dealt by Schedule I only and Schedule II shall merely classify the said transaction once it is established that it is a supply.

(Views are strictly personal)