BACKGROUND
GST has been rolled out in
India with one of its main features being bringing about a seamless flow of
input tax credit (ITC) across goods and services.
Provisions
of the Act related to ITC: The same are covered under
Chapter V of the Central Goods and Services Tax Act (CGST Act) and section 16
provides the criteria for eligibility and conditions for claiming the ITC which
are reproduced below:
‘(i) 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;
(ii) he has received the goods or services, or both;
(iii) 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
(iv) he has furnished the return u/s 39.’
Section 16 of the Act
entitles any registered person to claim ITC in respect of inward supply of
goods and services which are used or intended to be used in the course of business or
furtherance of business. Section 49 provides the manner in which ITC is to be
claimed. Section 49(2) provides that ITC as self-assessed in the return
of a registered person shall be credited to his electronic credit ledger in
accordance with section 41.
Further,
section 41(1) provides that every registered person shall, subject to such
restrictions and conditions as may be prescribed, be entitled to take credit of
ITC as self-assessed in the returns and such amount shall be credited on
provisional basis to his electronic credit ledger.
Section 42 provides for
matching, reversal and reclaiming of ITC by matching details of ITC furnished
in GSTR-2 with GSTR-1 of suppliers. It lays down the procedure for
communication of missed invoices with a facility for rectification of GSTR-1.
Due to technical limitations,
the process of filing GSTR-2 and 3 was suspended by the GST Council in its 22nd
and 23rd meetings. In the interim, the taxpayer was permitted to
avail ITC upon fulfilling the remaining conditions specified u/s 16, viz. valid
documents, actual receipt of supply, etc.
ISSUE
New Rule
36(4) inserted vide Notification No. 49/2019 with effect from 9th
October, 2019
The above-mentioned rule
relates to availment of input credit and was inserted in the CGST Rules
(reproduced below):
‘(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 by 20 percent 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.’
As per the said rule, a
recipient of supply will be permitted to avail ITC only to the extent of valid
invoices uploaded by suppliers u/s 37(1) plus 20% thereof. In effect, the said
sub-rule provides restriction in availment of ITC in respect of invoices or debit notes, the details of which have not been uploaded
by the suppliers in accordance with section 37(1).
To clarify doubts, Circular
No. 123/42/2019-GST was issued on 11th November, 2019. It clarified
that the computation of the credit available as per the rule is required to be
done on a monthly basis, while computing the liability for the month and filing
GSTR-3B.
It was also clarified that
for the purpose of computation the auto-populate GSTR-2A as available on the
due date of filling of Form GSTR-1 should be considered and the balance credit
not appearing in the GSTR-2A can be claimed in succeeding months provided the
same appears in GSTR-2A
.
UNFAIRNESS
The registered persons who
have to file GSTR returns (GSTR-1) on a quarterly basis still need to make payment of taxes on monthly basis through Form GSTR-3B. GST, being a value-added
tax (VAT), a registered person is required to pay tax on his outward supplies after
taking credit of taxes paid on inward supplies. Thus, tax is payable on margin.
But the newly-inserted Rule requires the assessee to pay tax on outward
supplies and the ITC will be granted later on the basis of information uploaded
by the suppliers through their GSTR-1, which will be reflected in GSTR-2A.
Those who are filing GSTR-1 on quarterly basis, say for the months October, November
and December, 2019, the taxpayers will not have any credit and they will have
to make double payment of tax, i.e. once they have paid to the supplier and again they have to deposit with the government through GSTR-3B of
October, November and December, 2019. Although credit is not denied but it is
being postponed for three months. This is a huge drain on working capital for
all the taxpayers and more particularly on small and medium-sized businesses.
In the case of the SMEs and
MSMEs filing quarterly GSTR-1, the recipient would not be in a position to
claim ITC in respect of inward supply from them till return in GSTR-1 is filed
by them, although they are paying tax regularly every month. These enterprises
apprehend that because of this rule customers will prefer not to buy from them
and it will impact their existence and survival.
GSTR-2A is dynamic in
nature and is akin to moving the goalpost given the direct linkage to the
GSTR-1 filed by the supplier. The amount of ITC claimed vs. the amount reflected
in the ever-changing 2A with the books of accounts would result in a never-ending spiral of reconciliations.
GST returns are prone to
human error such as wrong punching of GSTIN, taxable amount, etc. for which the
amendment is required to be made in the following month’s GSTR-1 return. In
such cases, even if the claimant dealer has availed credit to the extent of the
amount reflected in the 2A on the due date of filing, a subsequent amendment by
the supplier can have severe consequences, even though the procedure was
followed correctly.
The Rule and the
clarification are silent on how they will operate vis-à-vis the invoices
pertaining to periods prior to October, 2019 which were uploaded by the
suppliers prior to October, 2019 but ITC on which is claimed post-October,
2019, and also vis-a-vis invoices between the 1st and the 8th
of October, 2019.
SOLUTION
Let the principle of
substance over form be followed. Let the GST return process be fully
implemented with all modules effective so that genuine credit is not denied.
Till then, Rule 36(4) be postponed and allow seamless credit flow.
CONCLUSION
IS IT FAIR?
In legal, commercial and compliance perspective
The present rules in
respect of ITC and furnishing details thereof in the return are not changed so
far. It is proposed to change new return provisions as contained in section 43A
from 1st April, 2020. The newly-inserted provisions of section 43A
provide for restriction of ITC maximum up to 20%. This provision is not yet put
into force and is proposed to be brought in from 1st April, 2020.
Is it fair
on the part of the government to provide for restriction of ITC by 20% by
inserting sub-rule (4) in Rule 36?
As per law, currently there
is no requirement nor is there any facility to match invoices to claim ITC. So,
denying and restricting ITC by rule is contrary to the provisions of the Act,
particularly sections 38, 41 and 42.
GST law is stabilising, the
continuous tinkering with procedural aspects time and again creates confusion
and results in destabilisation.
Primarily, as per the new
section, ITC is available only for the entries appearing in GSTR-2A. For no
fault of genuine taxpayers, the ITC would be denied if it does not appear in GSTR-2A
which is out of his control and despite all valid documents on his records.
The government has not
appreciated the fact that a vast majority of the populace still has limited
access to technology and internet which are crucial for compliance. They are heavily
dependent on their consultants who are constantly battling with the frequent
changes in the compliance process; would they be able to cope with the
additional burden of matching credits?
Today businesses are
bleeding or working on paper-thin margins due to economic factors. How do they
survive if genuine credits are denied due to systemic issues?
How could ITC ever be
presumptive? What is the logic / basis of the 20% benchmark? Is it really
seamless flow of credit?
IS IT
FAIR? In broader perspective
India
recently moved to the 63rd ranking from 77th among 190
nations in the World Bank’s ‘Ease of Doing Business’ with a target to reach the
50th rank by 2020. Is it fair on the part of the law makers
to make frequent changes in the rules and compliances, small and sometimes
irrelevant, that cause a lot of stress to the business and professional
community, with escalating cost of compliances? Are we really on track to move
up to the 50th rank in ease of doing business?
