Beyond Law & Logic: Introduction of Rule 36(4) the CGST Rules


Beyond Law & Logic: Introduction of Rule 36(4) the CGST Rules

A reply to a question in the LokSabha revealed that during the FY 2018-19, 1,620 cases of fake invoices were detected wherein  fraudulent ITC to the tune of Rs. 11,251 crore was noticed by  GST Authorities.

And, for the first 3 months of the current fiscal, 535 cases involving an amount of Rs. 2,565 crore was noticed..

Absolutely it’s painful and wrong. It needs to be controlled by all ways & means.

Be it issue like GST fraud, or issue like Vijay Mallaya or Nirav Modi, we need to control it with apt rules and regulation.

But, with Rule like 36(4)?

It is like a police officer issuing an open letter to the citizens in his area that in case of any theft, the affected person has to arrest the thief. If the affected person arrests the thief, he will get his material back and not otherwise. Even if the affected person informs the police officer that Mr. X has committed the theft, police officer will not recover it or make an attempt to recover it. It is like an open declaration that the Police department will not be responsible for any of this act with a silent declaration that their existence cannot control the theft occurring in his area and individual citizens have to take care of themselves.


Its not about police Department or IPC Act.

Its equally applicable to the recent amendment in the GST Act which restricts the eligibility of the credit of input tax (ITC) to the buyer. Importantly, reasons for the restriction is that the seller has not deposited the tax in the Government Treasury. The details of the person who has not deposited the tax is already known or can be easily known by the GST department.

An immediate question arises, whether the authorities are not EMPOWERED to collect the tax from the seller? Or, whether the registration certificate is issued by the buyer ? Or Buyer is a partner of seller in every case of purchase & sale transactions?

GST department have all the powers including the power to inspect, examine and arrest the seller in such cases. Do buyers have power to recover the amount from the seller if the seller doesn’t deposit the tax?

If Government department with all state power at its disposal is not able to recover then whether the buyer will be able to do it? Is it logical to expect the buyer to do so?

 It is not question of 20% allowance or balance disallowance, it is a question of inability or helplessness of the Government or its authorities in handling the situations. It is like a Police Department saying that “We are helpless. You manage it on your own”.

Is it giving a sign of strong administration or weak authorities?

True, there are defaults or even fake invoices at the end of the Seller. But, is buyer involved in the process? Buyers have same power which are vested with the Departmental authorities are vested with?


If the department is not able to handle it, Why not introduce the concept of TDS so that the buyer don’t make the entire payment to the seller but do TDS & deposit it n the Government Treasury.

Why should Authorities not bother about the recovering the tax from the seller?

Why GST department is just concerned about their revenues and not concerned with the buyer who is an honest taxpayer?


[A silent question, whether buyer will be rewarded a share in the Government treasury if he ensure that the seller pay the Government Due Properly.]

Government needs to believe that the Citizens are by and large honest and the present rule is an attack not only on their honesty but also on their intention?

Lot many Bureaucrats & tax professional, without any bad intentions or any doubts on their credibility, irrationally asked “Government needs to collect tax and buyer can ensure it. So, what’s wrong with this provision?”

I believe that State is supreme & there supremacy is well established world over. They have control over their citizens.

Such strong control was admittedly not possible few years back when everything was manual driven. But with e-driven & aadhar linked system, control over 125 Crores of population is fully possible.  Demonetization working has proved that the Government is able to generate strong data base within a shortest possible time. It has accessed large data base of around 125 Crore  within a weeks’s time after 31st December.

Rather than restricting claim of ITC to 20%, The rule should have been –

“The buyer will get the credit if they file monthly statement showing the transactions which are not reflected in the GSTR-1 of the seller.”

And, then penalizing the seller for each such defaults.


Let us not punish the honesty for few dishonest people.

Absolutely without any reservation, I must say that the present amendment is nothing but looks like a coward act of administration.  I totally agree that the fake activities and manipulator need to be punished but at the same time, the genuine buyer need not suffer for their activities.

The present amendment will invariably –

  1. Increase the compliance burden on the honest taxpayer
  2. Block the working Capital of business and industry who are already undergoing through a tough phase.
  3. Result in killing of unproductive human time & energy to match tax credit on a monthly basis.
  4. Create negative sentiments amongst the business houses.
  5. Will be a big & dark negative spot on the ease of business.

Recently, Gujarat High Court has issued notices to Center, State on limiting input tax credit in GST.


I strongly hope that section 36(4) be voluntarily withdrawn by the Government and not withdrawn by court Ruling.

Undeniably, restricting the input tax credit (ITC) of the buyer for default of seller in not uploading the required details by the supplier is totally illogical & improper. The present move appears to be the diplomatic tactics which may have been adopted to meet immense pressure of fiscal deficit. It is a serious burden for every law-abiding taxpayer. It is sure to result in massive unrest in the economy

It is like punishing 100 honest taxpayers for the sake of punishing 2 dishonest citizens.

Views for and against my present articles are highly welcome.