Problems in availing of ITC under GST

Problems in availing of ITC

When the Goods and Services Tax (GST) was introduced for the purpose of indirect taxation, it was envisaged that it will introduce a tech enabled compliance system where the supplier will file his details of every outward supply transaction made by him and the same shall get auto-populate the recipients and appear on the recipients GSTR 2. The job of the recipient would only be to either validate or confirm or modify the entries and make the final submission of GSTR 2. After this submission the data of both the inward and outward supply shall get auto-populated in GSTR 3 to compute the total tax for a specific period. However, it was not a rosy ride and problems in availing of ITC started cropping up.

Present system in availing of ITC 

The tech enabled system failed to perform as per the expectations and government was forced to defer GSTR 2 for an indefinite period. With GSTR 2 deferred being deferred indefinitely, there was no proper mechanism to validate compliance from the vendor’s end. Now, only after satisfaction of the following three conditions can a taxpayer avail the Input Tax Credit (ITC):

  • Receipt of tax invoice
  • Receipt of services or goods
  • Payment made to the vendor    

Problems in availing of ITC 

There are two ways through which a government can increase its tax revenue. One way is increasing the rate of tax itself and the other way is by restricting the credit available for utilization to the taxpayers. The government has chosen the latter option to increase the tax flows in the government exchequer.

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A new rule i.e. 36(4) was inserted in CGST Rules, 2017[1] by the government to restrict the taxpayer from availing the ITC. The rule said that a taxpayer can avail ITC upto maximum of 20 percent of the eligible credit for the invoices and debit notes have not been uploaded by the supplier. This limit of 20% was brought down to 10% from 1st January 2020 and again reduced to 5% from 1st January 2021 onwards.

It must be noted that no statutory backing existed for introducing this rule. There exists no provision in the CGST Act which allows the government to put any restrictions in availment of ITC. The general principle of law says that a rule should always supplement the law. But in this since no law exists, the government should have framed a law in the CGST Act itself.

Judicial pronouncements   

A new rule 36(4) was inserted in the CGST Rules from 1st January, 2022 to statutorily back the newly inserted section 16(2)(aa). The section states that a taxpayer can avail ITC only when the vendor who has supplied goods or services has made disclosure of the transaction in GSTR 1 and the details also appear in GSTR 2B of the taxpayer.

This has complicated the matters for the taxpayer because he will have to be cautious every time when he on-boards any vendor because every non-compliance made on part of the vendor will result in adding up of costs for the taxpayer.

 It seems that the government has made it the responsibility of the taxpayer to oversee and keep reminding the vendor to fulfil the compliances which was actually the responsibility of the government. This shows that the government has transferred the burden of checking compliances on the taxpayer.

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The question arises whether the given provision stands the test of judicial scrutiny? It seems that the provisions will not be able to sail through the judicial test because it casts the duty of validation on the end of the taxpayer which is ideally to be done by the government and secondly it becomes an impossible task to always keep a tab on the vendor whether he has fulfilled the task of filing of tax returns. Additionally, these provisions are also adding problems in availing of ITC which cannot be accepted since no provision can be made by the government which curtails the taxpayer from availing his due Input Tax Credit.

In the case of Arise India Ltd. and Ors v Commissioner of Trade and Taxes, the Delhi High Court held the task of ensuring that the selling dealer deposit the tax collected from the purchasing dealer is an impossible task on the part of the purchasing dealer because of the selling dealer fails to deposit the tax, the purchasing dealer undergoes the risk of being denied the ITC. The provision places an onerous burden on the bona fide purchasing dealer.   

Issues to be resolved relating to problems in availing of ITC     

A confusion still looms large that about how should section 16(2)(aa) be dealt with for the invoices that have been receive prior to 1st January, 2022 and how much credit is yet to be availed on them or in cases of quarterly return filers etc.


The auto-populated mechanism under GSTR 2 has only been deferred but section 42 is still in force. Despite having it a new credit mechanism has been introduced. The taxpayers must be cautious because they can be held liable not for their own mistakes but also for the acts committed by their vendor. Only Judiciary can help the taxpayers from the problems in availing of ITC under GST.  

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