Methodology for computation of provisional ITC of 20% under rule 36 in GST

Note on applicability of Notification no. 49/2019-Central Tax

At the outset, the legal validity of the aforesaid amendment can be challenged from three different angles viz:

1. Whether the new rules (imposing the restriction of 20% on input tax credit ('ITC')) could be implemented without notifying Section 43(A) of the CGST Act?  
2. Whether amendment in Rule 36 of the CGST Rules, 2017 could be brought about, leaving the recipient at the whims of the supplier, thereby violating a person of its substantive right and overriding Article 14 and Article 19 of the Constitution?
3. Whether the amendment could be introduced and viewed as a new condition to Section 41 of the CGST Act, 2017 addressing the conditions for entitlement of credit?

Now, if the last question is answered in affirmative, the first and the second contentions could be trashed.

Besides, there was a lot of confusion on its applicability from September 2019 returns (which has been filed in October 2019) or October 2019 returns. While certain clarifications with regards to the Notification is awaited, it is advisable that the Company proceed towards implementing the amended rules in the return to be filed for the period of October 2019 onwards.

Further, with the Notification coming into effect, the reconciliation activity shall be done on a monthly basis which can be kick started only after the due date of filing of GSTR-1, i.e. 11th of the month after all the vendors shall have filed their GSTR-1 for the month.

Methodology for computation under rule 36

Calculation of ITC available for availment for the month of October 19

Step 1: Calculation of opening transactions as on 1st October 19

For the purpose of reconciliation, we need to perform a reconciliation between GSTR 2A and GSTR 3B considering the data from April to September 19 and identify the below:

1. Missing in client data (transactions which are not reflecting in purchase register)
2. Missing in GSTR 2A (transactions which has not been uploaded by the vendor)

Step 2: Calculation of Actual provisional credit

1. Perform reconciliation between the data as per purchase register and data uploaded by the vendor (which is reflecting GSTR 2A) as per below

2. Outputs/ status of above reconciliation are:

1. Matched transaction- which has been matched between above two
2. Missing in GSTR 2A- data which has not been uploaded by the vendor in above reconciliation
3. Missing in client data- data which is not available in above ERP/ purchase register

3. Actual provisional credit would be missing in GSTR 2A as per 'B (II) of step 2'

Step 3: Calculation of Limit of provisional credit

Limit of provisional credit would be 20% of matched transaction as per 'B (I) of step 2'

Step 4: Calculation of total ITC available for availment in October month return

Total credit available for availment in the month of October would be:

1. Matched transaction as per 'B (I) of step 2'; and,
2. Lower of actual provisional credit as per 'C of step 2' or provisional credit as per 'step 3'

Calculation of ITC available for availment for the month of November 19

Step 1: Calculation of Actual provisional credit

1. Perform a reconciliation between the purchase register and data uploaded by the vendor as per below

2. Outputs/ status of above reconciliation are:

1. Matched transaction- which has been matched between above two
2. Missing in GSTR 2A- data which has not been uploaded by the vendor in above reconciliation
3. Missing in client data- data which is not available in above ERP/ purchase register

3. Actual provisional credit for the month of November would be calculated by reducing YTD provisional credit availed in the previous months as per 'II of step 4'.

Step 2: Calculation of limit of provisional credit

Limit of provisional credit would be 20% of matched transaction as per point 'B (I) of step 1'.

Alternatively, we can perform the YTD reconciliation considering the data from April to November 19 for both the side and calculate the YTD limit of provisional credit considering the matched data for the month October and November. Thereon, we reduce the provisional availed credit from October till the previous month as per 'II of step 4'. The same would also take care of all the amendment made by the vendor in previous months data.

Please note in alternative option wherein limit would be calculated on the basis of GSTR 2A of the current month, we would not be able to get 20% limit on late return filed by the vendor. Also,

Step 3: Calculation of total ITC available for availment in the month of November 19 (in GSTR 3B)

Total credit available for availment in the month of November would be:

1. Matched transaction as per 'B (I) of step 2' for the November month calculation; and,
2. Lower of actual provisional credit as per 'C of step 1' or provisional credit as per 'step 2'

For subsequent months the steps for November 2019 would be repeated.