‘Change is the only constant’ - A phrase the CBIC seems to have adopted with the trade being bombarded with a barrage of amendments and day to day clarifications in the GST laws since the implementation of GST. The CBIC by way of Notification No. 49/2019-Central Tax dated 9th October 2019 has notified yet another round of amendments to the CGST Rules which may have far reaching implications for the trade and industry both from the point of view of increased burden of compliances and financial hit that the companies may now be forced to take on account of blocked mis-matched input tax credits.
By Notification No. 49/2019-Central Tax sub-rule (4) has been inserted in Rule 36 in the Central Goods and Services Tax Rules, 2017 (“CGST Rules”) which restricts the input tax credit (‘ITC’) in case of mis-match of invoices. The said Rule 36(4) is 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 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.”
Thus, Rule 36(4) aims to limit the availment of ITC by the recipient in respect of invoices/debit notes, details of which have not been uploaded by the supplier in its FORM GSTR-1 filed under Section 37(1) of the CGST Act, 2017.
Let us decode the new insertion with a simple example. If an assessee has total input tax credit of Rs. 150 of which Rs.100 is reflected in GSTR-2A and Rs. 50 remains un-reflected, the total input tax credit that can be availed is Rs. 120 i.e. 100 + Rs 20 (20% of Rs. 100). Thus, input tax credit of Rs. 30 out of Rs. 50 which remained unreflected cannot be claimed.
The above amendment has been brought about to give effect to the matching concept which had been envisaged as the backbone of GST by the lawmakers. However, since GSTR-2 and GSTR-3 continue to remain non-operational, the matching of inward and outward supplies remained largely theoretical. With the above amendment, the government has reinforced its intention to disallow the input tax credit on account of mis-match and also put to rest any litigation on this account by codifying disallowance of credit in case of mis-match by way of insertion of Rule 36(4) in the CGST Rules.
While the intention of the Government remains very clear, the amendment does not seem to be very well thought of, as lot of unanswered questions have emerged due to the amendment. One of the lingering question before the assessees for implementing the above provision is “What is eligible credit” for determination of 20%. It is pertinent to note that the term ‘eligible credit’ is not defined under the CGST Act or IGST Act.
Whether the amount of eligible credit is to be derived from the GSTR 2A as it is, or is the said credit required to be subjected to reversal of common credit as per Rules 42 and 43 before calculating the 20%, is not clear. Also, assuming that an assessee computes the eligible credit after reversal as per Rule 42 and Rule 43, what will be the implication of re-computation of the common ITC reversal under Rule 42(2) of the CGST Act, where excess credit is to be claimed or say is to be reversed at the end of the year?
A question may also arise as to whether the credit accruing on account of GST paid under reverse charge mechanism (RCM) being an eligible credit will also be includible in the calculation of Rule 36(4), in light of the use of the words “…. which have been uploaded by the supplier under sub-section (1) of section 37.” The GST in case of tax paid under RCM being majorly by way of self-generated invoices, the same would not be uploaded by the supplier in the GSTR-1 prescribed under Section 37(1) who in majority of the cases would not be registered under GST. There would be similar situation in case of importation where the supplier is not required to file GSTR-1 under Section 37(1).
However, the said doubt has been clarified to some extent by the Sl. No. 1 of the Circular No. 123/42/2019-GST, dated 11-11-2019, which states that IGST paid on import, documents issued under RCM, credit received from ISD, etc., are outside the ambit of sub-section (1) of Section 37, hence the provisions of Section 36(4) shall not apply to such cases.
However, what about suppliers who are registered and yet making supplies which are taxable on reverse charge basis? In such cases, the suppliers upload their invoices in GSTR-1 under Section 37(1) of the CGST Act. Therefore, the question arises as to whether the restriction contained in Rule 36(4) would apply or not. This has not been specifically clarified by the Circular dated 11-11-2019.
Further, there may be cases where the supplier has uploaded an invoice for supply in the GSTR-1 of previous months, say May 2019 and the same is reflecting in the GSTR-2A of the assessee for May 2019 but the assessee has not availed ITC on account of non-receipt of invoice or goods in that month. Now, in October 2019 the assessee receives the invoice and avails input tax credit in the GSTR-3B for the month of October 2019. What happens in this situation? In other words, a question arises whether the phrase ‘20% of the eligible credit available’ restricts the available eligible credit as referred in the rule only to the amount visible in GSTR 2A for the month of October 2019?
Further what treatment is to be afforded to an invoice which pertains to a previous tax period but is uploaded by the supplier in his October 2019 GSTR-1 return? An issue which shall also garner a lot of attention is the question as to whether the calculation as per the rule is to be done on a consolidated basis for all the four taxes namely IGST, CGST, SGST & UTGST or on standalone basis for each tax type? If a stand beneficial to the assessee is taken and the calculation is done on a consolidated basis, then what would be the ratio in which the credit as per Rule 36(4) is to be availed among the tax heads?
Yet another question before the assessees in computing the eligible credit is the implication of reclaiming of ITC after reversal as per the 2nd Proviso to Section 16(2) of the CGST Act, i.e. reversal of ITC in case payment of value and tax is not made within a period of 180 days from the date of invoice.
As can be seen, even after the issuance of a clarificatory circular the questions which remain unanswered seem to be aplenty. The practical implementation of this rule looks very challenging and the trade and industry should brace themselves to ensure proper compliance with the rule to avoid uncertainties and litigation to the extent possible. Appropriate representations may also be filed by the industry to highlight the problems being faced and to seek appropriate resolutions from the government. The government on its part is expected to issue further detailed clarifications on the practical aspects of implementation of the rule to ensure a smooth ride for the industry which already seems to be grappling with other issues amongst the slowing economy.
[The authors are Associate, Senior Associate and Joint Partner, respectively, in GST Practice, Lakshmikumaran and Sridharan, Mumbai]