GST

Avail ITC in GST as per Section 16(2)(aa)

GST was introduced and implemented in 2017; however, taxpayers continue to grapple with GST regulations and compliances. New businesses can be seen struggling with the issues concerning GST, such as filing returns, claiming refunds, etc. Just when taxpayers seem to be getting a grip over the technicalities surrounding this nascent and ever-evolving world of GST, a wind of change blows, and the taxpayers are left perplexed all over again. The year 2022 brought yet another wave of change in the GST Laws by introducing two major amendments to the GST Law in the form of a new clause that was added to Section 16(2) of the Central Goods and Services Tax (CGST) Act and by placing a restriction on the provision of ITC (Input Tax Credit). These stringent measures were introduced by the government to augment further the revenue being generated. In this article, we will delve into the details of these amendments, which the government has brought in, and we will further see the overall impact of these changes on the Input Tax Credit (ITC).

What is an Input Tax Credit?

Before we take a dive into the technicalities introduced by the Amendment, let us first briefly discuss the Input Tax Credit. Input Tax Credit, popularly referred to as ITC, is an essential part of the GST regime, and availing of ITC is very crucial for every business in order to settle its overall tax liability.

In relation to taxation, it is the tax that a business pays on purchase, which that business can later utilize to reduce its tax liability when it makes a sale. It implies that businesses can reduce their overall tax liability by claiming credit to the extent of GST paid on purchases.

 All three Acts, CGST, SGST, and IGST, have a provision for ITC. Credit under all three Acts can be used for discharging the tax liability under IGST, whereas only credit of IGST and CGST can be availed in the CGST Act, and credit of IGST and SGST can be taken under the SGST Act, however as easily as it may seem, claiming ITC can be a herculean task.

Conditions for availing of ITC

Not every business or taxpayer can claim ITC on its whims and fancies. A law and procedure in place elaborates when and how a business can choose to claim ITC and take advantage of the purchases made during the tax period. The law comprehensively lays down the conditions and scenarios under which such a claim may be allowed to businesses to reduce their tax liability.

Conditions as per Section 16 of the CGST Act

Section 16(2) of the Central Goods and Services Tax Act explains the conditions that are required to be satisfied by the recipients before claiming ITC in their returns. According to the said provision, a registered person shall be entitled to take advantage of ITC if:

• He is in possession of taxpaying documents such as tax invoices, debit notes, or other tax-related documents issued by the vendor or the supplier registered under the Act
• He has received or deemed to receive goods or services or both
• He has paid the tax charged on the invoice to the government, either through cash or by utilizing ITC
• He has furnished the return for the tax period

Ineligible to claim ITC

Failure to fulfil the above-mentioned conditions will make you ineligible to claim ITC. Apart from this, there are certain cases in which you still cannot claim ITC. These are as follows (though not exhaustive):

• In the case of composite dealers
• On purchase of capital goods that are used for non-business purposes.
• On purchase of capital goods that are to be used for manufacturing exempted goods
• Blocked Credits
• Purchase of goods and services for private use
• Purchase of goods and services to construct immovable property for personal or business use.
• ITC cannot be claimed on motor vehicles having a seating capability of fewer than 13 people, leasing, renting, or hiring motor vehicles, etc.
• On purchase of food and beverages, catering, health services, plastic surgery, etc.

Recent Amendment in the law

Recently, the Central Board of Indirect Taxes vide notification no.39/2021, dated December 21, 2021, has notified an amendment through which the Finance Act, 2012¹ has inserted a new clause (aa) to Section 16(2) of the CGST Act.

With this Amendment of rules, the government has ensured that there is symmetry of information furnished by the vendors and recipients as well by ensuring that every invoice generated by the businesses enters the GST data, and thus, every business transaction can be monitored.

Additionally, the government has done away with provisional ITC as earlier recipients could claim a certain percentage of the total eligible ITC even if the supplier did not upload certain invoices in his return; however, this is no longer allowed. There is no scope for a mismatch of invoices between the vendors and the recipients.

Pre Amendment

 Earlier vendors or suppliers were required to include such invoices in their GSTR-1, which was then auto-populated in the form GSTR-2A of the recipient of goods or services and after being included in GSTR-2A, the taxpayer could claim the ITC on those goods and services. Furthermore, another rule that governed the provisions of ITC also allowed the taxpayer to claim a percentage of the total ITC even on the basis of invoices that have not been uploaded by the supplier in his GSTR-1 Return.

Post Amendment

But the Amendment has strictly introduced one more condition for availing ITC, which is for a registered person to avail ITC on an invoice; the same must be reflected in form GSTR-2B of the registered taxpayer. This Amendment has basically prescribed an additional condition for availing ITC, and it commends that in order to be eligible for ITC, the details of the invoice issued by the registered supplier must reported by that supplier in his outward return and must be communicated to the registered recipient in the manner illustrated in Section 37 of the CGST Act.

Reasons behind the Amendment

The government has brought this Amendment to Section 16(2) by inserting an additional responsibility in the form of Clause (aa) with the intention to augment the revenue collection as availing and claiming ITC will no longer be a road without bumps. With the advent of this change claiming ITC has become tougher for most of the taxpayers.

The government has ensured that each and every business transaction gets recorded in the GST data and thus can be effectively monitored by ensuring the uploading of every invoice issued. With this, the communication channels between vendors and recipients will be strengthened as the compliance will require them to constantly update each other.

Effect of Amendment in Section 16(2) of CGST Act

Due to the implementation of the Amendment, a registered taxpayer can claim ITC only if the corresponding supplier or vendor has uploaded such an invoice in his GSTR-1, and the same is communicated to the recipient through GSTR-2B.

No provisional ITC

Therefore, the rule that earlier allowed the recipients to claim a certain percentage of eligible ITC, even if the supplier has not uploaded certain invoices, is no longer applicable. In the absence of such provisional ITC, the tax liability is bound to increase, which will negatively impact the profitability of these businesses. Thus, every invoice must be uploaded by such a supplier for the recipient to avail ITC on such invoice.

Additional Responsibilities on Recipients

This Amendment has introduced a set of additional responsibilities and conditions that are required to be fulfilled by the recipients now in order to claim ITC. This might be burdensome for a lot of recipients who will now have to ensure that their respective vendors also comply with these newly introduced rules and regulations in order for them to be able to obtain ITC. They will have to constantly ensure that their counterparts comply as well; otherwise, failure on their part to comply might lead to adverse consequences for the recipients.

Difficulty in furnishing correct data

Furthermore, compliance is not going to be the sole problem. Correct and accurate compliance is going to be necessary, as incorrect ITC Claims will result in pecuniary penalties.

Difficulty in communication

Taxpayers who would earlier rely on the last minute communication will now have to ensure that reconciliations are real-time and more frequent than ever, which might require some technological intervention; otherwise, the entire tracking and reconciliation process is bound to get cumbersome and difficult.

Conclusion

Input Tax Credit has been a crucial part of the GST regime since its advent, and ITC is critical for every business to settle its overall tax liability. Many businesses used to rely on the 5% provisional ITC which was available to them in case there was a mismatch of invoices uploaded by the vendors and the receivers. This allowed them some relief and breathing space at the end of the tax period. However, with changes brought in Section 16(2), the benefit of provisional ITC is no longer an option, and this has placed an additional burden on the businesses to ensure there is an effective and frequent communication channel established with their vendors, in order to ensure compliance on their part as well. Now taxpayers have an added responsibility to check and ensure that their vendors are also filing their returns correctly and uploading their invoices in their return so that they can reconcile the data in GSTR-1 and GSTR-2A for them to avail ITC. This may seem difficult and time-consuming for the recipient taxpayers as they will have to face various challenges while ensuring compliance, and if you find yourself caught in the web of intricate web taxation, you may take expert advice or hire professional help.

If you wish to know anything regarding GST Returns, then you may contact Enterslice.

FAQs:

1. https://en.wikipedia.org/wiki/Finance_Act_2012