Capping of ITC not reflected in GSTR-2A up to 20%: Analysis

The central government vide Notification no 49/2019 central tax dated 9/10/2019 has made amendments to CGST Rules, 2017. One of the amendments is insertion of sub-rule (4) to rule 36 which is reproduced as follows:

'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.'

Analysis

The above sub-rule seeks to restrict the ITC in respect of invoices/debit notes not uploaded by seller in GSTR-1 ( and consequently does not appear in GSTR-2A) to the extend of 20% of eligible ITC in respect of invoices/debit notes uploaded by seller in GSTR-1(which is supposed to appear in GSTR-2A).

This amendment seeks to negate down para 4 of press release dated 18-10-2018 which reads as follows:

'It is clarified that the furnishing of outward details in FORM GSTR-1 by the corresponding supplier(s) and the facility to view the same in FORM GSTR-2A by the recipient is in the nature of taxpayer facilitation and does not impact the ability of the taxpayer to avail ITC on self-assessment basis in consonance with the provisions of section 16 of the Act. The apprehension that ITC can be availed only on the basis of reconciliation between FORM GSTR-2A and FORM GSTR- 3B conducted before the due date for filing of return in FORM GSTR-3B for the month of September, 2018 is unfounded as the same exercise can be done thereafter also.'

Illustration of sub-rule 4 of Rule 36

1. Suppose for the month of October 2019, Mr.A, a registered person, has Rs.1,00,000 as eligible ITC in respect of which respect of invoices/debit notes uploaded by his seller in their GSTR-1 and appear in GSTR-2A of Mr.A; and Rs.50,000 as ITC in respect of which respect of invoices/debit notes has not been uploaded by his seller in their GSTR-1 and does not appear in GSTR-2A of Mr.A.

After the insertion of sub-rule 4 to Rule 36, the eligible credit of Mr.A shall be as follows:

Effectively, ITC in excess of 20% i.e. Rs.30,000 (50,000 - 20,000) shall be ineligible for availment for the month of October.

2. Suppose for the month of October 2019, Mr.A, a registered person, has Rs.1,00,000 as eligible ITC in respect of which respect of invoices/debit notes uploaded by his seller in their GSTR-1 and appear in GSTR-2A of Mr.A; and Rs.10,000 as ITC ITC in respect of which respect of invoices/debit notes has not been uploaded by his seller in their GSTR-1 and does not appear in GSTR- 2A of Mr.A.

Thus, in this case, the entire ITC in respect of invoices/debit notes uploaded by seller in GSTR-1 amounting to Rs.10,000 shall be available as it is less than 20% of eligible ITC (Rs.1,00,000).

Impact of the amendment

After the insertion of this sub-rule, the reconciliation of GSTR-2A and invoices has become mandatory to find out the ITC to be availed for each month. This results in a strenuous workload to the tax-payer / practitioners/professionals to reconcile the GSTR-2A each month. Also, taxpayers have to keep a close follow up with their suppliers which can sometimes result in tough relationship with the vendor.

Another common issue is that the supplier may inadvertently report B2B transactions as B2C as a result of which invoices/debit notes may not appear in GSTR-2A of the recipient. The time lag to amend the same by the supplier may result in a blockage of funds for the recipient.

For those taxable persons who have a single/very few suppliers who are MNCs/organized sector such as in case of automobile industry may not be much affected by this amendment as the reconciliation and follow-up will be easier. But for those taxable persons who are retailers or in the lower levels of the chain especially in the FMCG industry or Multi-product dealers may find it hard to reconcile and follow up with suppliers every month.

Open Issues to be addressed

• Mismatches between GSTR-1 and GSTR-2A - Since GSTR-2A is auto-populated on the basis of the corresponding FORM GSTR-1 furnished by suppliers even after the due date, in such cases there would be a mismatch between the updated FORM GSTR-2A and the actual invoices for a given period, making it difficult to reconcile both.
• GSTR-1 filed quarterly by supplier - In case of taxable persons having Turnover less than Rs.1.5 crores, the GSTR-1 is to be filed quarterly (Notification 46/2019 central tax dated 09/10/2019). However, since ITC is to be availed each moth in FORM GSTR-3B, it becomes impossible to reconcile monthly invoices with GSTR-2A (as it would be updated only after the said quarter). Govt has to issue some clarification in these cases.
• Calculation problems - The newly inserted sub-rule does not clarify the situations when the supplier reports the invoice/debit note in a subsequent tax period. Whether this amount will form part of eligible ITC for the reported tax period for the calculation of 20% is a question yet to be clarified. Also when the invoices/debit note is reported subsequently, whether the ITC can be taken as credit on FIFO basis or on a pro-rata basis is also to be clarified.

For example, Suppose for the month of October, Mr.A has availed Rs.1,00,000 as eligible ITC and Rs.20,000 in respect of ITC for which supplier has not uploaded invoice/debit notes amounting to say, Rs.50,000 and for the month of November, suppliers have uploaded invoices for Rs.30,000. A question will arise whether this whole Rs.30,000 can be availed in the month of November or only Rs. 18,000 (30,000 x 30000/50,000) can be availed. While the taxpayer may argue as the former is intended by the notification, department may argue for the latter.

Legal Issues

• Section 164(1) empowers the Government, on the recommendations of the Council, by notification, to make rules for carrying out the provisions of this Act. When the provisions of CGST Act, 2017 viz., section 16 and section 17 does not provide for such embargo and the matching provisions contained in section 41, 42, 43 and 43A has been suspended as Form GSTR-2 is not operational, whether a rulemaking power be invoked for such restrictions has to be looked into. Further, it is a well-established ratio that rule cannot override the provisions of the Act.
• The newly inserted sub-rule does not distinguish between bona fide cases where the mismatch is due to fault of the supplier and non bona fide cases where bogus credits are claimed, thus violating Article 14 of the Constitution of India (granting equality before law). This ratio is laid down by Delhi High Court in the case of Arise India Limited and Quest Merchandising India Pvt Ltd and the same view has been concurred by the Supreme Court of India.
• On failure of supplier to furnish details in his Form GSTR-1, the recipient is restricted ITC without any failure on his part. It violates the basic principle of law viz., Lex non cognit ad impossiblia i.e Law cannot compel a man to do what is impossible. It is against the principle of natural justice and hence unreasonable.

Possible Solutions

It has been two years since the inception of GST and it is high time GSTR-2 and GSTR-3 are made operational. The matching provisions as envisaged in the model GST law should be implemented. This will at least allow the taxpayer to add, correct or delete inwards supplies in his Form GSTR-2 which can be accepted or rejected by the supplier.

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