IS IT FAIR TO INTERVENE WITH SEAMLESS FLOW OF INPUT CREDIT – RULE 36(4) OF CGST RULES?

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 22^nd and 23^rd 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 9^th 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 11^th 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

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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 1^st and the 8^th 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 1^st 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 1^st  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 63^rd ranking from 77^th among 190 nations in the World Bank’s ‘Ease of Doing Business’ with a target to reach the 50^th 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 50^th rank in ease of doing business?