| Mar-23-2021

Intricacies of GST Input Tax Credit (ITC) Restriction/ Relaxation Under Rule 36(4) Of CGST Rules

Section  16 of CGST Act, 2017 read with Rule 36 of CGST Rules, 2017 provides for eligibility and conditions for taking ITC.

With  an  objective  to  curb  fictious  availment  of  ITC  by  taxpayers  in GSTR 3B Return, the Government being unable to implement GSTR 2 &  GSTR  3  Returns  or  New  Returns  systems,  eventually  introduced Rule 36(4) w.e.f. 09th October 2019 providing restriction on availment of ITC based on uploading of invoices by Supplier in GSTN Portal i.e., should appear GSTR 2A of taxpayer.

Historically most of GST amendments would bring lots of muddles and hullabaloos requiring clarifications. I have attempted to provide points to ponder around the same in the below Q&A style.

Q: What is Rule 36(4) restriction in simpler terms?

A: Taxpayer  can  avail  ITC  on  the  invoices  in  their  monthly  GSTR  3B Return to the extent of invoices uploaded by suppliers in their GSTR 1 i.e., available GSTR 2A of the taxpayer plus 20% (10% w.e.f. 01 January 2020) of the eligible credit in amount available in GSTR 2A.

Q: How to practically calculate the ITC to be availed in a period in line with restriction?

A: Let us take the month of October 2019,

• Step 1: Taxpayer has 100 eligible input invoices for which ITC (INR 10 Lakhs) to be availed in GSTR 3B; The invoices would be dated from April 2019 to October 2019;
• Step 2: Download GSTR 2A for the period April 2019 to October 2019 as on 12th November 2019;
• Step 3: Reconcile the 100 invoices with GSTR 2A downloaded and segregate as available or not available in GSTR 2A;
• Step 4: 70 Invoices having ITC of INR 6 Lakhs is available in 2A – can be availed as it is plus 20% of INR 6 Lakhs e., INR 1.2 Lakhs can be additionally availed by taxpayer;
• Step 5: Taxpayer identifies 5 Invoices having ITC of INR2 Lakhs, hence credit in the month of October is availed on 75 Invoices (INR 7.2 Lakhs); and
• Step 6: Rest of 25 invoices would be carried forward to next month reconciliation again and follow above steps to determine amount of ITC to be

Q: Whether  filing  of  GSTR  1  by  supplier  is  mandatory  for  restriction under Rule 36(4)?

A:  Rule  36(4)  says  ITC  is  available  on  invoices  which  have  been uploaded in GSTR 1 by the supplier, hence it appears that irrespective of  GSTR  1  being  filed  or  not  by  the  supplier,  once  the  invoice  is available in GSTR 2A of the taxpayer it should be sufficient compliance of Rule 36(4). In other word the column heading with name “Counter Party Filing Status” in GSTR 2A auto-populated can be ignored.

Q:  Whether  the  additional  ITC  (20%  /  10%)  to  be  availed  each  head wise i.e., IGST/CGST/SGST or on total basis?

A: The Government has not provided any clarification around  the  same, however, logically it appears that calculations of restriction and additional ITC availment should be each head wise only.

Q:  Whether  invoice-wise  breakup  is  must  for  availing  the  additional ITC of 20%/10% as per Rule 36(4)?

A: Rule 36(4) provides for adhoc availment of additional 20%/10% of eligible  matched  credit,  hence  a  proper  invoice  wise  break-up  is  not necessary  for  compliance  purposes.  However  practically,  a  taxpayer should  ideally  have  proper  break-up  of  invoices  on  which  credit  is availed under additional 20%/10% category to be have proper track of same for further reconciliations and assessment purposes.

Q:  What  happens  when  a  taxpayer  misses  to  download  GSTR  2A  of 12th  of  the  succeeding  month  and  does  the  reconciliation  with  2A downloaded later after 12th?

A: GSTR 2A is a dynamic document which gets updated continuously based   on   filing   of   GSTR   1   by   the   suppliers.   Hence,   in   my   view, practically the proper officer would allow the ITC claimed based on late downloaded  GSTR  2A  considering  the  overall  objective  of  availability in GSTR 2A is met.

Q:  When  to  avail  credit  on  invoices  received  from  supplier’s  filing GSTR 1 on quarterly basis?

A: Invoices uploaded by supplies in quarterly GSTR 1 would appear in the GSTR 2A of last month of quarter in which it is uploaded. Hence, the  credit  on  the  same  can  be  availed  belatedly  in  the  last  month  of quarter  only  if  not  availed  within  the  limit  of  additional  20%/10% credit.

Q: Whether the new introduced Form GSTR 2B at GSTN Portal will be helpful for calculation of credit as per Rule 36(4)?

A:  GSTR  2B  is  a  new  version  of  GSTR  2A.  It  is  a  static  auto-drafted document, say for the September 2020, it will contain all the invoices uploaded by supplier from 12th September to 11th October irrespective of the date of invoice or period in which it is uploaded by the Supplier.

In  my  view,  for  simple  taxpayers,  the  GSTR  2B  is  boon  and  will immensely   ease   out   their   compliances   for   36(4).   However,   for large/complex   taxpayer,   still   GSTR   2A   would   be   important   for reconciliation of older invoices on which credit is availed late but filed timely by their supplier.

Q: What is the proviso introduced in Rule 36(4) providing relaxation from restriction?

A: In the wake of COVID-19 pandemic, the Government among other relaxations provided relaxation from complying with Rule 36(4) for the periods from February 2020 to August 2020 i.e., Credit can be availed as  per  Books  during  said  period  with  a  condition  that  cumulative adjustment as per Rule 36(4) of the credit availed during said period to be done during the filing of GSTR 3B of September 2020.

Q:  How  to  calculate  the  cumulative  adjustment  to  be  done  in  case credit  is  availed  as  per  Books  during  the  period  February  2020  to August 2020 as per the relaxation provided?

A:  Let  us  take  credit  is  availed  in  GSTR  3B  as  per  Books  during February to August 2020,

• Step 1: Total Credit is availed on 1500 Invoices having ITC of INR 15 Lakhs; The invoices would be dated  from  April 2019 to August 2020;
• Step 2: Download GSTR 2A for the period April 2019 to August 2020 as on 12th October 2020;
• Step 3: Reconcile the 1500 invoices with GSTR 2A downloaded and segregate as available or not available in GSTR 2A;
• Step 4: 1300 Invoices having ITC of INR 13 Lakhs is  available in 2A – can be availed as it is plus 10% of INR 13 Lakhs e., 1.3 Lakhs can be additionally availed by taxpayer;
• Step 5: Hence total credit eligible for February to August 2020 as per Rule 36(4) would be INR 3 Lakhs vs the INR 15 Lakhs availed as per filed GSTR 3B’s in respective month;
• Step 6: Reverse the differential amount of INR 0.7 Lakhs in the GSTR 3B of September 2020 from eligible ITC to be availed for September 2020 computed considering the 36(4) restriction.

Q: Whether any liability to pay interest arises on the reversal made for differential excess ITC availed as seen in above example?

A: NO. If a taxpayer calculates cumulative adjustment to be done and reverse such excess ITC availed by the due date of filing GSTR 3B for the month of September 2020, then no interest is liable to be paid. In case, it is missed to be reversed by September 2020 GSTR 3B due date and reversal done in later months, then Interest is liable to be paid as it amounts to ineligible ITC availed.

Q: Whether the restriction provided in Rule 36(4) is  valid  when  no such restriction is provided in the Act?

A:  CGST  Act  does  not  provide  any  condition  of  reconciliation  of  ITC with GSTR 2A for availment in GSTR 3B. It can be argued that ITC is a vested  right  and  subordinate  legislations  cannot  override  the  benefit envisaged  in  the  Act.  Various  Writ  Petitions  have  been  filed  at  Delhi, Gujarat and Rajasthan High Courts contending that Rule 36(4) is ultra vires to CGST Act.

Conclusion:

Due to the inability of Government to implement GSTR 2 / 3 Returns or  New  Returns  system,  it  has  passed  on  same  compliance  to  be manually  done  by  the  taxpayers,  which  is  burdensome  on  genuine taxpayers. Since the introduction of GSTR 3B, credit is being availed on self-assessment  basis,  thus  Rule  36(4)  restriction  could  have  been implemented   on   a   cumulative   yearly   basis   easing   out   compliance burden  on  taxpayers.  Further,  the  relaxation  provided  for  the  period February to August 2020 on account of COVID-19 Pandemic is a great step  and  Government  should  extend  the  same  for  some  more  time period.