Addition in conditions for availing ITC! Existence of Rule 36(4)! Finance Bill, 2021

Clause100 of Finance Bill, 2021. In section 16 of the Central Goods and Services Tax Act, in sub-section (2), after clause (a), the following clause shall be inserted, namely:––

“(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;”.

A new clause (aa) to sub-section (2) of the section 16 of the CGST Act is being inserted to provide that input tax credit on invoice or debit note may be availed only when the details of such invoice or debit note have been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note.

The taxpayer gets entitles to input tax credit only as per the conditions laid down in section 16(2) of the CGST Act, 2017 is mentioned below:

(a) 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;

(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37

(b) he has received the goods or services or both.

(c) 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

(d) he has furnished the return under section 39:

Reason behind incorporating clause (aa) in section 16(2)

Earlier, it was envisaged that GSTR1, GSTR 2 and GSTR 3 should be filed by the taxpayers but due to certain difficulties GSTR 2 and GSTR 3 could not be implemented and has been kept in abeyance led the birth of GSTR 3B. Had GSTR 2 been implemented, the procedure to claim ITC and matching exercise for availing ITC would have been travelled from its provisional nature to finality. However, due to continues extension in due dates of GSTR 2 and GSTR 3 and as the same has been kept in abeyance, the matching exercise gets automatically extended. Hence, in order to avail ITC (though provisional) a separate self-ensuring mechanism was incorporated vide 37th GST Council meeting held on 20th September, 2019 wherein it was recommended that to push taxpayers to timely file their statement of outward supplies i.e. GSTR 1, by way of imposition of restrictions on availment of input tax credit by the recipients in cases where details of outward supplies are not furnished by the suppliers in the statement (GSTR 1) under section 37 of the CGST Act, 2017. In other words, the recipient shall now be allowed to avail input tax credit based on the valid document which means unless the invoices are uploaded by the supplier in their GSTR 1 and gets reflected in the GSTR 2A of the recipient, the recipient shall not be allowed to avail the input tax credit.

In order to give effect to the decision of the 37th GST Council Meeting a new rule 36(4) was inserted which stipulates that the 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 section 37(1) i.e. in GSTR 1, shall not exceed 20% of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under section 37(1) i.e. GSTR 1. The said rule has been inserted vide Notification No. 49/2019-Central Tax dated 9th October, 2019, effective from 9th October, 2019. The said % has been gradually decreased from time-to-time i.e. 10% and currently it is 5%. However, it appeared that there was no power in the CGST Act, 2017 which gave power to frame rule 36(4) as section 16(2) which lays down the conditions for entitlement strictly stipulated that ‘Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless’, therefore, it appears that unless conditions are expressly written in section 16(2) of the CGST Act, 2017, it becomes difficult to read rules in consonance with the provisions of the Act.

Accordingly, a new clause (aa) to sub-section (2) of the section 16 of the CGST Act is being inserted to provide that input tax credit on invoice or debit note may be availed only when the details of such invoice or debit note have been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note.

It is significant to take care of the following aspects due to the change in the aforesaid provision:

· Apart from having a possession of tax paying documents, the details of the said invoices should be shown in GSTR 1 of their suppliers and must reflect in the corresponding statement of the taxpayer i.e. GSTR 2A (GSTR 2B is for facilitation).

· The details as shown in the tax paying documents in possession should not differ from those shown in GSTR 2A. The credit of taxes appears to get entitles only when all the four conditions are satisfied, therefore, every detail should run in consonance with each other. Difference in any details in either of the physical document or details reflect in GSTR 2A, may be questionable, as the condition (a) and (aa) are not optional, further, condition (aa) expressly stipulates that the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies. Though, the procedures available at GST Common Portal in the Offline Tool suggest for remedial actions in regard to partial match, partial mis-match, probable match, unmatched, etc.

· It is significant to note that merely ensuring the availability of procurement details in GSTR 2A will not work as condition (c) demands for ensuring that the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply. In this regard, it is worthwhile to note that the recent amendment in Form GSTR 2A also provides this functionality to check if the GSTR 3B has been filed by their suppliers or not.

· The validity of rule 36(4) now becomes questionable as section 16(2)(aa) clearly states that credit shall be available only if the details of the said tax paying documents are appearing in GSTR 2A of the recipient. Nevertheless, Government may issue a clarification as the said proposal is still a proposal and may take time till it becomes The Finance Act, 2021 and the notification is issued in this regard.

· Earlier, the same condition was incorporated as proviso to section 16(4) which merely stipulated for uploading of details in GSTR 1 by the suppliers but now the caution has been maintained by stating that the said tax paying documents details should also be reflected in the GSTR 2A of the recipient.

· Section 41 deals with the claim of ITC on the provisional basis. It is stipulated under section 41(1) that every registered person shall be entitled to take the ITC on self-assessment basis in GSTR 3B subject to conditions prescribed in rule 69 and such amount shall be credited on a provisional basis to his electronic credit ledger. In simple words, it means that taxpayer has been given an opportunity to assess his ITC eligibility and claim accordingly but the same shall not be considered as final i.e. it remains provisional. The question which pops up is what is provisional and till when? ITC availed directly in GSTR 3B by the taxpayer is provisional and it remains provisional till the same becomes final by the mechanism of matching principle as envisaged in section 42. Since GSTR 2 and GSTR 3 has been kept in abeyance, the matching automatically gets extended. Therefore, it appears that all credits availed in GSTR 3B is provisional in nature and does not attains finality in the absence of mechanism of reconciliation as envisaged in GSTR 2 and GSTR 3. It is worthwhile to note that as per section 41(2), the credit referred to in section 41(1) shall be utilized only for payment of self-assessed output tax as per GSTR 3B. In other words, ITC cannot be utilized for any other liability, for instance, the liability in case of demand order, etc. It remains unclear if the credits availed remains provisional even after following all the four conditions stipulated under section 16(2) including the new condition (aa).

· It is highly suggestable that the taxpayers should revisit the SOP for availing ITC in all their entities and should get aligned with the proposals of the Finance Bill, 2021, so that all the credits availed for the previous FYs as well as any credit to be availed henceforth are legitimate as per the conditions of section 16(2). Revisit of clauses should also be done in agreements executed with all the vendors (B2B) in order to avoid any future litigation/forming such eligible credit as a cost to the entity.