INTRODUCTION
When GST was introduced in July, 2017, heavy
emphasis was placed on the matching process under GST which required a transaction-level
matching of B2B transactions and claim of credit being dependent on the
matching activity in the form of GSTR2. However, due to systems constraints,
GSTR2 as well as GSTR3 were kept in abeyance and the truncated process of
return filing was introduced requiring the taxable persons to file only GSTR1
and a new statement in Form GSTR3B in place of GSTR3 was introduced.
Due to the suspension of GSTR2 and GSTR3
returns, the process of matching of transactions and credits and filing of
returns based on the same could not be implemented. Due to fall in revenue
collections, the Government suspects that the lack of matching could result in
large-scale evasion and false input tax credit (ITC) claims filed by assessees
facing liquidity crunch.
Based on the limited information available,
various Department authorities did issue letters or notices to the assessees
highlighting an aggregate-level mismatch in the input tax credit claims and the
credits reflecting in GSTR2A. However, the authorities could not enforce the
matching process since they lack legislative mandate in view of the suspension
of the process of filing of GSTR2 and GSTR3 returns. It may be noted that the
provisions of sections 42 and 43 requiring payment of tax on account of provisional
mismatch not being rectified in two months is dependent upon sections 37 and 38
for claim of credit through the process of matching, reversal, reclaim and
reduction.
In pursuance of various recommendations, the
Government proposed to introduce new returns where the flow of information is
unidirectional from the supplier to the recipient. The new returns process also
requires a matching of credit and permits self claim of provisional unmatched
credit for a period of two months to the extent of 20% of eligible matched
credit. To enable the new return-filing process, the CGST Amendment Act, 2018
inserted section 43A. Section 43A(4) thereof deals with prescription of
procedure for availing input tax credit in respect of outward supplies not
furnished and specifically provides for prescription of maximum ITC which can
be availed, not exceeding 20% of the ITC available on the basis of details
furnished by the suppliers and appearing in GSTR2A. However, since the
implementation of the new returns has been postponed, the provisions of section
43A have not been made effective till date.
The procedure as referred to in section
43A(4) has now been prescribed vide an amendment to the CGST Rules, 2017 by
Notification 49/2019–CT dated 9th October, 2019. Vide the said amendment,
Rule 36(4) has been inserted which provides 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 20 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
On a first reading of the above provisions,
the issues that crop up could be listed as under:
- Legality of the above
amendment;
- Applicability on credit
availed in earlier period returns (3B);
- Applicability on credits of
earlier period invoices availed before and after 9th October, 2019;
- Whether Rule 36(4) would be
applicable at the time of filing GSTR3B for September, 2019 (the due date of
which was 20th October, 2019)?
- Whether the matching has to
be done at invoice level or consolidated level?
- Which GSTR2A to be
considered for doing the matching process?
- Implications when the
supplier is required to furnish the details on quarterly basis;
- Accounting and disclosure
implications;
- Flood of mismatch notices
expected after the amendment.
Considering the above, the CBIC has also
issued clarifications on various points vide Circular 123/42/2019 dated 11th
November, 2019. However, there are certain open-ended issues which would need
further clarification. We have attempted to analyse the same in this article.
Issue
1: Scope of applicability of the provisions
This can be examined from two different
perspectives, one being the date of invoice and the second being the date of
filing of return. It is relevant to note that under GST, availment of credit
takes place only upon filing of returns under GSTR3B. The various aspects which
would need consideration are:
(a) If the return for period on or before
September, 2019 is not filed and filed after 9th October, 2019, will
the RTP be required to comply with the provisions?
(b) Will the provisions apply to invoices
dated prior to 9th October, 2019 but credit availed after 9th
October, 2019?
With respect to (a) above, the CBIC has
clarified that Rule 36(4) would apply only on invoices / DNs on which credit
note is availed after 9th October, 2019. Therefore, in cases where
the returns were filed before 9th October, 2019, the amended
provisions should not apply. This is because filing of returns would mark the
availment of returns. Therefore, since at the time of filing the return the
provision was not in place and, more importantly, it has not been given
retrospective effect, Rule 36(4) cannot apply to such cases.
However, there can be instances where the
returns for earlier period, say, August, 2019 and prior are filed after 9th
October, 2019 or credit relating to invoices dated prior to 9th
October, 2019 is availed after that date. For such cases, as per the
clarification issued by CBIC, and even otherwise, on a plain reading of Rule
36(4) it would be apparent that the provisions of Rule 36(4) would apply to
such cases. This view also finds support in the decision of the Supreme Court
in the case of Osram Surya (P) Limited vs. CCE, Indore [2002 (142) ELT
0005 SC]. In the said case, Rule 57G of the Central Excise Rules, 1944
was amended to prescribe a time limit for availing credit within six months
from the date of issue of the document. In this case, the Supreme Court held
that credit could not be claimed. However, it is imperative to note that in the
said case the validity of the said Rule was not looked into since the same was
not challenged before the Court.
This aspect was
also noted by the Gujarat High Court in Baroda Rayon Corporation Limited
vs. Union of India [2014 (306) ELT 551 (Guj)] wherein the Court held
that the condition resulted in lapsing of credit which had already accrued in
favour of manufacturer and therefore the rule was violative of Article 226 of
the Constitution. However, it is imperative to note that even the Gujarat High
Court has allowed the credit only on the premise that the Rule was ultra
vires of the Act since the Act did not empower the Government to make rules
to impose conditions for lapsing of credit.
It is imperative
to note that in the current case, section 43A does empower the Central
Government to prescribe rules for imposing restrictions on availing of input
tax credit. For this instance, reliance on the decision of Baroda Rayon
Corporation (Supra) may not be of assistance.
It is, however,
important to take note of the decision of CESTAT in the case of Voss
Exotech Automotive Private Limited vs. CCE, Pune I [2018 (363) ELT 1141
(Mumbai)]. In the said case, the issue was in the context of proviso
to rule 4(7) which introduced time limit for availing credit w.e.f. 1st
October, 2014. In the said case, the Tribunal held that the amendment did not
apply to invoices issued prior to 11th July, 2014 (the date of
notification by which the amendment was introduced) for the reason that the
notification was not applicable to invoices issued prior to the date of
notification and, therefore, restriction could not be applied to invoices
issued prior to the said date. However, it is imperative to note that the said
decision referred to the ruling of the Madhya Pradesh High Court in the case of
Bharat Heavy Electricals Limited vs. CCE, Bhopal [2016 (332) ELT 411
(MP)] which also relied on the decision of the Gujarat High Court in
the case of Baroda Rayon Corporation.
In view of the
above, it would be difficult to argue that the provisions of Rule 36(4) do not
apply to invoices dated prior to 9th October, 2019 on which credit
is availed after that date. However, it can be said with certainty that the
same would not apply to cases where credits were availed before 9th
October, 2019.
It may also be
important to note that the validity of Rule 36(4) has been challenged before
the Hon’ble Gujarat High Court in SCA 19529 of 2019 and the
matter is currently pending. The challenge is on the ground that since the
provision of section 43A has not been notified till date, insertion of Rule
36(4) is not maintainable. It therefore remains to be seen whether the Court
accepts the argument
and strikes down the provision or it treats Rule 36(4) as being prescribed
under the general powers granted u/s 16(1) of CGST Act, 2017 which empowers the
Government to frame conditions for availment of credit.
Issue 2: Which GSTR2A to be considered for the
matching process?
Assuming that
Rule 36(4) does survive the test of validity, the next question that remains is
with respect to its implementation. This is important because while the
availment of credit takes place at the time of filing of return, it is possible
that credits of invoices issued by suppliers for multiple periods would be
claimed in a tax period. For instance, while filing the GSTR3B for September,
2019, it is possible that the invoices issued by suppliers between April, 2019
and August, 2019 as well as invoices of the previous financial year would be
claimed. In such a case, it is likely that the credit that would be claimed in
GSTR3B would be higher as compared to credits appearing in GSTR2A for
September, 2019. This will open a barrage of notices of GSTR2A vs. GSTR3B
mismatch for different tax periods, though on a cumulative basis there may not
be a mismatch.
To deal with
this particular situation, for credit availed in each month, the data will have
to be analysed vis-à-vis the month to which the invoice pertains and
corresponding comparison with GSTR2A of the respective tax period will be
required. For this reason, the Board has also clarified that the matching will
be done on consolidated basis (after reducing ineligible credits appearing in
2A) and not supplier basis. However, in case credits of the previous financial
year are claimed, it will always be an open issue and care will have to be
taken to ensure that the figures match with the figures reported at Table 8C of
GSTR9.
Another aspect
to be noted is that GSTR2A is a volatile figure, i.e., even after the due date
of filing GSTR1 of a particular month, there is no restriction on filing of
GSTR1 and therefore GSTR2A downloaded on 11th October, 2019 and 20th
October, 2019 would represent completely different pictures. While the Board
Circular clarifies that the GSTR2A as on due date of filing of form GSTR1 u/s
37 (1) is to be considered, the 2A downloaded from the portal does not provide
the date on which the supplier has filed the GSTR1. It would therefore mean
that the clarification provided by the Board is not possible to comply with in
the first place itself. More importantly, Rule 36(4) also does not include any
such restriction.
A specific issue arises in cases where the
supplier has opted to furnish GSTR1 on quarterly basis, in which case there
will also be a time gap between the claims of credit by the recipient (which is
on monthly basis) vs. furnishing of information on quarterly basis by the
supplier. For such instances also, the circular clarifies that the credit
should be claimed only after the transaction appears in 2A. This, however,
appears to be harsh considering the fact that even under the earlier mechanism
of GSTR1 -2 -3, the law provided for the concept of self claim of credits up to
two months to enable the suppliers to file their GSTR1 and match the
transaction. Non-extension of the said benefit would appear to be contradictory
to the principles of matching laid down under the Act itself.
Another important aspect is that the
Circular clarifies that maximum ITC to be claimed shall be 20% of the eligible
ITC appearing in 2A. Even this clarification may present practical challenges
to the RTP since it may not be possible to identify the eligibility of credits
appearing in 2A merely based on the name of the vendor. While there may be
specific vendors who are identified as making supplies not eligible for ITC, in
other cases it may not be possible to easily comply with the said requirement.
Issue 3: Accounting and disclosure
implications
The next issue
that needs consideration is the manner in which the disclosure of credit needs
to be done in view of Rule 36(4). There are two different methods which can be
considered for disclosure in 3B, one being to avail and reverse credit in the
same month in 3B, and the other being to avail credit only when the credit
appears in the 2A.
The first method is preferable. Let us
understand this with the help of an example. ARTP receives an invoice from his
vendor dated 1st September, 2019. However, the said invoice is not
appearing in his 2A. Therefore, in the month of filing GSTR3B, he claims the
credit and reverses the same in view of the provisions of Rule 36(4). This
credit does not appear in his 2A till the time of GSTR3B for September, 2020.
However, on downloading fresh GSTR2A of 2019-20 on 21st October,
2020, the invoice appears in GSTR2A. In this case a view can be taken that
since the RTP had availed and reversed the credit in compliance with Rule
36(4), once the invoice appears in his GSTR2A in future, he can reclaim the
same and the time limit imposed u/s 16(4) for
availing the credit would not apply since this would be in the nature of
re-claim.
However, this
can also be subject to dispute by the authorities on the ground that the
restriction u/r 36(4) is r.w.s. 16(1). Therefore credit was not available at
the first point and therefore, the action and availment of reversal of credit
is futile and the credit appearing in GSTR2A after the expiry of statutory time
limit would not be eligible by treating the same as re-credits.
Issue 4: Applicability of Rule 36(4) to Input
Service Distributor (ISD)
The next issue
that needs consideration is whether or not Rule 36(4) will be applicable to
ISD? This is because ISD itself per se does not avail credit, the
availment of credit takes place at the receiving unit. This is also evident on
perusal of the definition of ISD u/s 2 which provides that ISD shall mean an
office of the supplier of goods
or services, or both, which receives the tax invoice issued u/s 31 towards the
receipt of input services and issues a prescribed document for the purpose of distributing the credit.
In other words,
ISD does not avail the credit and therefore a view is possible that rule 36(4)
may not be applicable to ISD.
Issue 5: Maintaining details for reconciliation
purposes and responding to mismatch notices
Even before the
insertion of Rule 36(4), assessees have been receiving notices from the
Department for mismatch in credits appearing in GSTR3B vs. GSTR2A. Attempting
to respond to this notice is turning out to be extremely difficult for the
assessees primarily because figures of credit availed in GSTR3B / GSTR2A do not
match with GSTR3B actually filed or GSTR2A downloaded from the portal. This in
itself makes it difficult for an assessee to prepare the necessary
reconciliations. Also to be considered is the time factor playing a part in the
mismatch as discussed earlier.
Therefore, it
would be advisable that for credits claimed in each month, as stated in the
earlier paragraph also, the details should be segregated vis-à-vis the month of
invoice and cumulative data for invoice month-wise credit claimed in a
financial year should be prepared which should be compared with invoice date-wise
credit appearing in GSTR2A. One should also take note of the fact that GSTR2A
of the entire financial year should be downloaded each month since there is no
concept of locking of GSTR1 and therefore the GSTR2A of earlier periods can
keep on fluctuating.
CONCLUSION
The amendment by
way of insertion of Rule 36(4) is going to have its set of ramifications, with
impact on small suppliers opting for furnishing of GSTR1 on quarterly basis to
all taxpayers having to delay their claim of credit on account of non-compliance
by errant suppliers. This will also launch a flood of notices to taxpayers for
mismatch in figures reported in GSTR3B and GSTR2A.
Taxpayers will
have to be very careful in responding to the notices electronically, wherever
they appear on the portal, and manually if notices are not sent through the
GSTN portal. Failure to do so may also have its own set of ramifications,
ranging from ex parte orders to ad hoc confirmation of demands.
Perhaps, this will be a testing time for all, taxpayers as well as their
consultants to step up to the changing scenarios.
