An analysis of Rule 36(4) – ITC availment under the new mechanism

The Central Board of Indirect Taxes(“CBIC”) released a crucial notificationon 09 October 2019, vide Notification No. 49/2019 (Central Tax), inserting anew sub-rule (4) under rule 36 of the CGST Rules, 2017, stating that Input TaxCredit (“ITC”) can be hereafterclaimed in the GSTR-3B only to theextent of 120% of eligible ITCreflected in GSTR-2A in aggregate.

A circular clarifying the issues videCircular No. 123/42/2019 – GST relating to the implementation of this new rulewas released on 11 November 2019 as well restricting the ITC where requisitedetails of invoices have not been uploaded by the supplier.

In this edition, we have presentedthe provisions in respect to ITC post amendment in a simple manner and alsohave used a practical illustration to explain how this mechanism will work.

Relevant provisions

NotificationNo. 49/2019 (Central Tax) dated 9 October 2019 seeks to make amendment in Rule36 of CGST Rules, 2017 which states:

“Input tax credit to be availed by aregistered person in respect of invoices or debit notes, the details of whichhave 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 ofinvoices or debit notes the details of which have been uploaded by thesuppliers under sub-section (1) of section 37”

Analysis of Rule 36(4) of CGST Rules, 2017

1. Rule 36(4) has been inserted videNotification No. 49/2019 dated 9th October 2019 with regard to restriction onthe availment of ITC in cases where GSTR-1 has not been filed by the supplier.This newly inserted rule is a substantive condition to be fulfilled for theavailment of ITC in addition to conditions prescribed u/s 16 of CGST Act.

2. Hence, in commonlanguage the ITC claimed in GSTR-3B of October 2019 should not exceed 120% of ITC reflecting in GSTR2A and such balance of GSTR 2A to be checked on the due date of filing of GSTR1 of the same month itself i.e. 11 November 2019.

3. Section 16 of CGST Act,2017 providethe following:

3.1. Only registered person will beeligible to take credit of ITC paid on inward supplies of goods or service orboth, which are used in the course or furtherance of business;

3.2. As per section (16)(2), fourconditions, as below, need to be fulfilled:

3.2.1. Possession oftax invoice, debit note or such other tax paying document which includesinvoice issued by Input Service Distributor (ISD) and bill of entry asprescribed under Customs Act, 1962;

3.2.2. Goods or serviceshave been received. If goods or services have been received in lots then itwill be assumed that the goods or services have been received at the time whenthe last lot is received. If the supply is made on the bill to ship to modelthen it will be assumed that the goods or services have been received by theregistered person at the time when goods or services have been received by theperson on behalf of the registered person;

3.2.3. Tax on supply isactually paid to the Government, and;

3.2.4. The recipient shallfurnish the return under section 39;

3.3. The recipient shallmake the payment for the supply of taxable goods or services or both within aperiod of 180 days. Payment for both values for goods or services and taxthereon shall be paid within a period of 180 days from the date of issue ofinvoice by the supplier, and;

3.4. The maximum timeperiod within which an ITC pertaining to an invoice can be claimed is up to thedue date of furnishing of return u/s 39 for the month of September, followingthe end of the financial year to which such invoice relates or the actual datefiling of annual return, whichever is earlier.

4. Going forward, ITC to be availed by a registered person in respect of invoices or debitnotes, the details of which have not been uploaded by the supplier, shall not exceed 20% of the eligible creditavailable in respect of invoices or debit notes the details of which have beenuploaded by the supplier. The new ITC availment mechanism can be explainedwith the help of below illustration:

5. In this illustration,filing of GSTR 3B of October 2019 (assumed filed on due date i.e. 20 November 2019)

5.1. The total no. ofinvoices received for the purchases made by the taxpayer is assumed to be 1000and the corresponding GST paid on the same is assumed to be INR 10 lakhs(Indian Rupees Ten Lakhs). In the erstwhile mechanism, the tax payer could havetaken the entire credit of INR 9 lakhs (considering INR 1 lakh is ineligiblecredit) in filing GSTR 3B, but in terms of the new methodology prescribed, thefollowing are the changes:

TABLE A

5.2. Therefore, under the new method,pursuant to the amendment, the taxpayer will be eligible to avail ITC of INR8,40,000 (India Rupees Eight Lakh Forty Thousand Only) instead of INR 9,00,000(Indian Rupees Nine Lakh) and balance INR 60,000 (Indian Rupees Sixty Thousand)to be carried forward to the subsequent month(s).

5.3. Treatmentin the Second tax period: During the month of November2019 and pertaining to GSTR 3B of the same month, the taxpayer receives 1200new invoices for the purchases made and the corresponding GST paid on the sameis assumed to be INR 12,00,000 (Indian Rupees Twelve Lakhs).

Further out of 2001invoices not appearing in GSTR-2A in the 1st tax period – refer Table A, (i.e.of GSTR 3B of October 2019, till 11-11-2019), 1602 invoices are now appearing:

TABLE B

5.4. ITC computation for the 1st period, referTable A, in 2nd tax period:

TABLE C

6. Hence, total credit eligibility forNovember 2019 becomes INR 3,20,000 (INR 288,000 + INR 32,000) instead of INR12,00,000 prior to the amendment.

7. The above process of reconciliationshall be done on a regular basis until all invoices of the relevant tax periodappear in GSTR-2A subject to time limit prescribed under section 16(4) of theCGST Act, 2017

8. In order to clarifythe provision and its applicability, the Government has issued CircularNo.123/42/2019 GST dated 11th November2019 and the important clarifications are

8.1. Self-assessmentbasis: This being anew provision, the restriction is not imposed through the common portal and itis the responsibility of the taxpayer that credit is availed in terms of thesaid rule and therefore, the availment of restricted credit in terms ofsub-rule (4) of rule 36 of CGST Rules shall be done on self-assessment basis bythe taxpayers;

8.2. Taxpayers may avail full ITC in respect of IGST paid onimport, documents issued under RCM, credit received from ISD etc;

8.3. Effective from 09 October2019: The effective date for the restriction of Rule36(4) will be applicable on the invoices/ debit notes on which credit isavailed after 09 October 2019 i.e. in FormGSTR 3B of October 2019 to be filed by 20 November 2019;

8.4. No supplier-wise restriction: The restriction imposed is not supplier wise. The creditavailable under sub-rule (4) of rule 36 is linked to total eligible credit fromall suppliers against all supplies whose details have been uploaded by thesuppliers;

8.5. Calculation willbe based on Eligible ITC only; the calculation would be based on only those invoices which areotherwise eligible for ITC. Accordingly, those invoices on which ITC is notavailable under any of the provision, say under sub-section (5) of section 17,would not be considered for calculating 20 % of the eligible credit available;

8.6. Further therestriction of 20% applies with respect to eligible input tax credit availableto the recipient in respect of invoices or debit notes the details of whichhave been uploaded by the suppliers under subsection (1) of section 37 as on the duedate of filing of the returns in Form GSTR 1 of the suppliers for the said tax period.

9. Integral questions:

9.1. The circular states thatthe eligible ITC as reflected in GSTR – 2A on the due date for filing GSTR – 1 needs to be considered. Hence, such date would be the 11th day of a given month, however the GSTIN will take around two days to be reflective in the respective GSTR - 2A. Moreover, no clarity on what will be position when GSTR-1 filedafter the due date;

9.2. CBIC Clarification is silent on quarterly returnfilers. In the case of Quarterly Taxpayer, the ITC shall not be available sincethe invoices will not be uploaded by the taxpayers on a monthly basis. This would lead to unnecessary blockage of working capital;

9.3.The legality of this amendment is likely to bechallenged on grounds of substantive right. There is a compelling argument thata bonafide taxpayer cannot be penalized by disallowing his eligible credits onaccount of non-compliance by the supplier;

9.4. Small suppliers whodo not use a software for keeping track of provisional credit claimed/claimablewill need to be vigilant, and install a mechanism where the same can beeffectively monitored. There is no functionality currently available on theGSTN, however, the system can check where ITC exceeds the 20% limit;

9.5. Contract Management becomes a veryimportant question and buyers should incorporate necessary clauses to safeguardin case the suppliers do not upload the requisite details;

.6. Time limit of availing ITC as persection 16(4) of CGST Act, 2017;

.7. The fate of credit availed prior to 09October 2019 still remains unanswered and also becomes a point to continuouslymonitor and if need be challenged before authorities or will open up several litigation.

9.8. Whether the restriction imposed by achange in Rule can override the restrictions under the Act which might lead toseveral litigation

10. Conclusion

This new rule 36(4) is restricting the ITC which is notshowing in GSTR-2A. It is very clear that due to this circular the hassle willbe increasedfor taxpayers as well as professionals also. In our opinion, itwill also affect the MSME sector and small businesses who file quarterlyreturns as most corporates would like to do business with monthly filers insuch a scenario.