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To overcome the malpractices of fake generation of invoices and fraudulent availment of the input tax credit by the taxpayers, an amendment was made in the CGST Rules. On 9th October 2019, the CBIC had inserted a sub-rule (4) to Rule 36 of the CGST Rules, 2017 to impose ITC restrictions on the claim of provisional credit. In the 38th GST Council Meeting Decisions held on 18th December 2019, the GST Council took further decisions with regard to limits on availment of provisional ITC in GSTR-3B. Such amount of provisional ITC has been further restricted to 10%* with effect from 01-01-2020 (*earlier 20%) in respect of invoices or debit notes which fail to reflect in GSTR-2A of the recipient.
Under the present GST return filing system, full ITC claim shall not be allowed to the taxpayers if their corresponding suppliers have not uploaded the details of outward supplies to be reflected as inputs in GSTR-2A. For those non-reconciled invoices, a registered person who files GSTR-3B is allowed to avail provisional ITC only to the extent of 10% of the eligible ITC allowable in GSTR-2A. The eligible ITC is such which is available on business invoices or debit notes, successfully uploaded by the suppliers in their GSTR-1, which gets reflected in the taxpayer’s GSTR-2A.
Also, Read: GST Compensation Cess may see a Downfall of Rs. 63000 Crore.
Table of Contents
The ITC restrictions by virtue of Rule 36(4) may be apprehended well with an example. Assuming that a taxpayer furnishes his GSTR-3B for the month of January 2020, his ITC restrictions before and after the imposition of Rule 36(4) shall be as follows:
Eligible ITC in Books/Purchase Register (Eligible ITC to be set-off against GST liability is such which relates to business activities of the taxpayer).
ITC for January 2020 as per book records
ITC for January 2020 pertaining to business purchases
Total Eligible ITC in books
Eligible ITC in GSTR-2A for which invoices are uploaded by suppliers in GSTR-1 (Eligible ITC is such which does not relate to taxpayer’s personal expenses or ITC mistakenly appearing due to wrong GSTIN fed by a supplier).
ITC for January 2020 as per GSTR-2A
Total Eligible ITC in GSTR-2A
Claim of ITC before Rule 36(4)
Eligible ITC in books which can be claimed
Eligible ITC in GSTR-2A which can be claimed
Provisional credit which can be claimed (Previously, entire Rs. 2,00,000 – Rs. 90,000 could be claimed as ITC)
Total ITC allowed to be claimed in GSTR-3B
Claim of ITC after Rule 36(4)
Provisional credit which can be claimed
(Only 10% of Rs. 90,000 can now be claimed as ITC). The balance may be claimed in the subsequent tax period once suppliers’ pending invoices are uploaded.
Rs. 9,000 (90,000 × 10%)
The balance ITC of Rs. 1,01,000 may be claimed proportionately in the succeeding months as and when invoices are uploaded by suppliers. For example, the eligible ITC pertaining to invoices uploaded by suppliers in the month of February 2020 amounts to Rs. 97,000. In this case, the total ITC allowed to be claimed in GSTR-3B in the month of February 2020 shall be:
Eligible ITC in GSTR-2A which can be claimed for February 2020
Provisional credit which can be claimed (*10% of Rs. 97,000, however, limited to maximum eligible ITC)
Total ITC which can be claimed in February 2020
Prior to the imposition of ITC restrictions, the taxpayers used to claim full ITC while filing their GSTR-3B (as provisional credit), even though GSTR-2A reflected a lesser amount of ITC than the books of account. Now, to compulsorily reconcile the ITC claim with GSTR-2A’s eligible credit, the provisional credit is restricted to the extent of only 10% of the eligible credit value for a particular tax period. Therefore, this new rule may affect the working capital position of the taxpayer since he shall be required to pay the balance GST liability (net of credit availed) in cash, despite holding invoices for eligible input purchases made by him from suppliers during the tax period. Also, the reconciliation exercise will be a cumbersome and time-consuming activity.
With the implementation of ITC restrictions under Rule 36(4), a lot of confusion rippled in the minds of taxpayers concerning its practical implications. It is hopeful that the new GST return filing system, after becoming operational, shall address the issues of ITC availment in a systematic manner.
Also, Read: Overview of GST on Advertisement Services and its Taxability.
A CA together with MBA (Fin) and M Com, she relishes taking interest in insightful writing in the domain of taxation and finance. She has gained experience as a full-time author and has also served an accounting role in industry.
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