Practical Issues in Compliance of Rule 36(4)

Vaibhav Garg | Last updated: 19 December 2020

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Quick Summary

Rule 36(4) of the CGST Rules, 2017, introduced in October 2019, restricts the input tax credit (ITC) that can be claimed for invoices not uploaded by suppliers to 10% of eligible credit. This rule aims to limit ITC claims where supplier details are missing in GSTR-2A. However, its implementation presents practical difficulties, including the arbitrary nature of the 10% limit and the burden of self-assessment for taxpayers.

The Central Board of Indirect Taxes and Customs (CBIC) on October 9, 2019, vide Notification No. 49/2019- Central Tax inserted sub-rule (4) in Rule 36 of Central Goods and Services Tax Rules, 2017 (CGST Rules, 2017) which restricts limit of input tax credit (ITC) in respect of those invoices or debit notes, the details of which have not been uploaded by the supplier under Section 37(1) of the Central Goods and Services Act, 2017 (CGST Act, 2017), to 10% [substituted 20% w.e.f, 01.01.2020 vide Notification No. 75/2019-CT] of eligible credit available the details of which has been uploaded by the supplier under Section 37(1) of the CGST Act.

Rule 36(4) of the CGST Rules, 2017 states as below:

"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 10 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."

Rule 36(4) Compliance: Practical Issues and Solutions

Therefore, we can say that the aforesaid rule aims to limit the availment of ITC by the recipient in respect of invoices/debit notes, details of which have not been uploaded by the supplier in its FORM GSTR-1 filed under Section 37(1) of the CGST Act, 2017.

Let's say for example- If a person has ITC of Rs. 500/-, out of which Rs. 400/- is being reflected in Form GSTR- 2A but Rs. 100/- remains unreflected. Now, by applying the abovesaid provision, it can be concluded that the total eligible ITC is Rs. 440/- [Rs. 400 + Rs. 40 (10% of Rs. 400)]. Thus, input tax credit of Rs. 60 out of Rs. 100 which remained unreflected cannot be claimed.

Section 37 of the CGST Act, 2017 states that:

"(1) Every registered person, other than an Input Service Distributor, a non-resident taxable person and a person paying tax under the provisions of section 10 or section 51 or section 52, shall furnish, electronically, in such form and manner as may be prescribed, the details of outward supplies of goods or services or both effected during a tax period on or before the tenth day of the month succeeding the said tax period and such details shall be communicated to the recipient of the said supplies within such time and in such manner as may be prescribed:

Provided that the registered person shall not be allowed to furnish the details of outward supplies during the period from the eleventh day to the fifteenth day of the month succeeding the tax period:

Provided further that the Commissioner may, for reasons to be recorded in writing, by notification, extend the time limit for furnishing such details for such class of taxable persons as may be specified therein:

Provided also that any extension of time limit notified by the Commissioner of State tax or Commissioner of Union territory tax shall be deemed to be notified by the Commissioner."

This is followed by Circular No. - 123/42/2019 - GST dated 11.11.2019 clarifying issues raised by the amendment.

The following analysis can be carried out by reading the said rule with the circular:

• A registered person can claim only 10% of ITC in respect of invoices not appearing in GSTR2A, this restriction is applicable only in respect of invoices/debit notes which are required to be uploaded by supplier u/s 37(1), that means full credit can be availed on IGST paid on import, documents issued under RCM, credit received from ISD etc. which are outside the ambit of sub-section (1) of section 37 of the CGST Act.

• The restriction imposed is to be calculated on an aggregate basis for a particular tax period, not supplier wise, also amount eligible for ITC should be counted for calculations.

• Keeping in mind that GSTR-2A is a progressive document, the amount of ITC admissible relating to invoices, not appearing in GSTR-2A should be ascertained as on the due date for filing return in GSTR-1 for the said tax period from auto-populated GSTR-2A.

Practical issues raised by the insertion of Rule 36(4)

• A question arises on the limit set i.e. 10% 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, that, "Is there any basis for this limit or it is arbitrary in nature?" This is very important as it signifies the view of the department that only said the percentage of the invoices which are not reflecting in GSTR-2A are genuine.

• In the said circular, it is mentioned that the restriction is not imposed through the common portal and it has to be done on a self-assessment basis, this raises a problem for the small taxpayers and even for normal taxpayers, one has to step in deep jargons of calculations in respect of invoices those were not reflecting in GSTR-2A earlier and 10% has been claimed and for the invoices not appearing now. This leaves taxpayers overburdened and in a dilemma stage as the practical implementation of the aforesaid provisions looks extremely challenging to them.

• The said sub-rule is applicable on credit which is availed after 09.10.2019, this haphazardly contravenes Section 16(4) of the CGST Act, which states that the ITC can be taken till filing of Annual Return under Section 44 or the due date of filing of return for September succeeding the financial year, whichever is earlier.

Conclusion

This sub-rule will impact the working capital of businesses as now only a limited part can be availed as ITC in respect of invoices not reflecting in GSTR-2A, this will lead to a greater outflow of cash as payment of tax liability which was earlier settled by adjusting ITC. This will impact the business dealings with small taxpayers who have opted for quarterly filing of returns, the credit in respect of all taxpayers filing quarterly returns will be blocked for 3 months leading to a greater requirement of working capital. By inserting this sub-rule, the governmental authorities have made claiming ITC more supplier-oriented. For a say, if your suppliers are not filing the returns timely, you have to suffer and need additional working capital requirements creating an unnecessary burden on the business.

FAQ :

Rule 36(4) restricts the input tax credit (ITC) a registered person can claim for invoices or debit notes not uploaded by suppliers to 10% of the eligible credit that has been uploaded by suppliers.

Rule 36(4) was inserted on October 9, 2019, with an initial restriction of 20%, which was later reduced to 10% effective from January 1, 2020.

The restriction is calculated on an aggregate basis for a tax period, not supplier-wise. It applies to the eligible credit available in respect of invoices uploaded by suppliers, with the un-uploaded invoices limited to 10% of this amount.

Yes, the restriction is only applicable to invoices and debit notes required to be uploaded under Section 37(1) of the CGST Act. Full credit can be availed on IGST paid on imports, documents issued under RCM, and credit received from ISD, as these are outside the ambit of Section 37(1).

Practical issues include the perceived arbitrary nature of the 10% limit, the burden of self-assessment as the restriction isn't enforced on the common portal, and potential impacts on working capital, especially for businesses dealing with suppliers who file returns quarterly.

The rule impacts working capital by limiting the ITC that can be claimed for un-uploaded invoices, leading to a greater cash outflow as businesses may need to pay more tax liability upfront instead of adjusting it with ITC.