On 9th October 2019, the CBIC issued notification inserting a new rule 36(4) to CGST Rules, 2017 which restricts the availment of Input Tax Credit (ITC) in respect of the invoices not shown by the suppliers in their GSTR 1. On 11 November 2019, circular released on clarifying some issues relating to this new rule.
There are several reasons which led the insertion of new Rule 36(4). The major one is the supplies made by the seller doesn’t matches with the details given by the recipient for the same. In spite of the differences, ITC was given for the full amount to the purchaser. But now the things have changed Government has issued a notification stating that credit to the extent of 20% of eligible ITC can only be claimed.
What this notification actually means?
As per the notification which is already in action, input tax credit to be availed by a registered person shall not exceed 20 percent of the eligible credit available in respect of invoices or debit notes uploaded by the suppliers, if the details of same have not been uploaded by the suppliers.
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This means, the ITC claim will not be allowed in full that is 100% to any recipient if their suppliers have not furnished the details of their outward supplies. Additionally, this notification also states that even after suspension of registration, businesses would be allowed to make taxable supplies, but they can’t charge tax on supplies or issue a tax invoice.
For example:-
| Sl. No | Particulars | Before the notification | After the notification |
| A | Eligible ITC available in the books of accounts. | 1,00,000 | 1,00,000 |
| B | Eligible ITC available in the GSTR-2A | 60,000 | 60,000 |
| C | ITC that can be claimed as provisional credit. | 40,000 | 12,000 (60,000*20%) |
| D | Total ITC that can be claimed in the GSTR-3B | 1,00,000 (60,000+40,000) | 72,000 (60,000+12000) |
| E | ITC not allowed in the GSTR-3B of November 2019 | Nil (1,00,000-1,00,000) | 28,000 (1,00,000-72,000) |
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In the above cases, Input Tax Credit appearing in the books (purchase register) for Nov’19 is Rs 1 lakh, whereas Supplier has only shown the sale of Rs 60 thousand in their GST return.
Earlier government used to give the ITC on whole amount shown by the recipient but now in the present scenario ITC is allowed to the extent of 20% on the difference amount of Rs 40 thousand instead on the whole amount shown by the recipient like earlier.
What will be the impact on taxpayers?
It is expected that there will be a significant impact on cash flow of firms. As until now 100 % input credit was availed by businesses. But from now on wards, in case of a mismatch or where details have not been uploaded by the suppliers, input tax claim will not exceed 20 percent of the eligible credit available in respect of invoices or debit notes not uploaded by the suppliers. In other words, ITC will be available 120% of the ITC available in GSTR 2A.
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This reduction of 80% claim will lead to reduction in ITC which means there will be more outflow of cash and cash equivalents.
This will also need to execute an additional compliance of executing monthly reconciliation of credits in GSTR 2A; to ensure availment of unmatched credits only upto 20 percent of eligible credits reflecting in GSTR-2A.
Why government brought such a big amendment?
This restriction to 20% will make the taxpayers mandatory to monitor whether the suppliers are uploading their returns on regular basis. So that they can take full claim of ITC. This will ensure two way examining of tax invoices. There will be more transparency and full disclosure of actual sales and purchase made among the parties.
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This rule is challenged. Gujarat High Court issued Notice to GST Council, CBIC AND Goods and Service Tax Network (GSTN). The next date of hearing is December 18.
What can taxpayers do to reduce issues arising from this rule?
- A taxpayer should have full knowledge of the invoices appearing in GSTR-2A and the types of credit available, the extent of ITC reported and the cataloguing of its defaulting suppliers. This will help him raise accurate ITC claims.
- This new rule could impact a company’s working capital; businesses will need to invest additional time in managing their accounts payables more effectively.
FAQs on Eligibility of Input Tax Credit on Food and Beverages
- Business will need to regularly reconcile their purchase data between their books and the GSTR-2A, identify mismatches and communicate the same to their suppliers so that they upload the missing invoices. Frequent following-up with vendor which needs to be managed.
- The whole rule is on self-assessment basis. The taxpayers should take more precautions as the department has started issuing the notices for the returns filed in October.
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The author of above article is Sneha Bhalotia.
