New Rule 36(4) in GST Law will affect the liquidity of the business
The 37th GST Council meeting held on 20 September 2019 had announced that the provisional ITC claim will be restricted under the present GST return filing system of GSTR-1 and GSTR-3B. The ITC claim will not be allowed in full for any recipient if their suppliers have not furnished the details of their outward supplies.
Notification on 9 October 2019 by CBIC has resulted in insertion of new sub-rule (4) under rule 36 of the CGST Rules, 2017, stating that provisional credit can be hereafter claimed in the GSTR-3B only to the extent of 20% of eligible ITC reflected in the GSTR-2A. The notification no. 49/2019- Central Tax dated 9 October 2019 adds a new clause to the rule 36 of CGST Rules.
As per the new sub-rule (4) inserted in rule 36 of the Central Goods and Service Tax Rules, 2017, a taxpayer filing GSTR-3B can claim provisional Input Tax Credit (ITC) only to the extent of 20% of the eligible credit available, in respect of invoices or debit notes, the details of which have been uploaded by the suppliers in the GSTR-2A.
The effective date of implementation is 9 October 2019. A circular clarifying the issues relating to the implementation of this new rule was released on 11 November 2019.
Before 9th October 2019, all taxpayers claimed ITC on a self-declaration basis in Table 4(a) of GSTR-3B. This means that they declared the summary figure of eligible tax credits under IGST, CGST, and SGST. There was no compulsion to reconcile the ITC figure with the GSTR-2A until now, although it was always advised. Even if the GSTR-2A reflected less ITC than the books of account, taxpayers could still make their ITC claim in full in the GSTR-3B, and the un-reflected amount was treated as provisional credit. After the implementation of this rule, the provisional ITC amount will be restricted only to the extent of 20% of the eligible ITC value already reflected in the GSTR-2A for that period. Apart from the 20% of eligible ITC which a taxpayer can claim as provisional credit, the balance tax liability will need to be paid in cash. This new rule could affect the working capital of a taxpayer, as he will be required to make GST payments in cash, despite having paid his supplier for the tax invoice raised to him and having eligible ITC in his books.
If ITC is restricted to 20% of non available credit in GSTR-2A then how the balance ITC can be claimed:
Balance unclaimed ITC cah be claimed in the succeeding months once details have been actually uploaded by the suppliers. If a supplier has only uploaded part of the pending invoices in a later period, the taxpayer will be able to claim ITC only proportional up to 20% of these pending invoices uploaded.
There are few important issues which need due consideration:
- Undeniably, GSTR-2A is a dynamic form which updates based on details uploaded by suppliers, the cut-off date for claiming provisional credit will be the due date of filing returns only. Hence, a taxpayer may claim up to 20% of ITC based on invoices uploaded by his suppliers as on the date of filing his GSTR-1.
- The restriction on 20% provisional credit is on aggregate basis & not supplier-wise. It will be linked to the total eligible ITC from all suppliers based on details uploaded in the GSTR-2A.
- The restriction on provisional credit will apply to those invoices/debit notes which were supposed to be uploaded by the suppliers and have not been uploaded. It means that a taxpayer can avail full ITC in terms of IGST paid on imports, credit that has been received from an Input Service Distributor (ISD), credit from documents received under reverse-charge mechanism and any other such credit.
3 If any parts of the pending invoices are uploaded by the supplier in subsequent months, the taxpayer must make sure that provisional credit does not exceed 20% of eligible ITC.
4 The provisional ITC availed in a tax period shall be limited to ensure that the total ITC availed does not exceed the total eligible ITC. This means that the lower of provisional ITC or difference in eligible ITC (between books and GSTR-2A) will be considered.
5 A taxpayer should have a full understanding of the invoices appearing in his GSTR-2A – the types of credit available, the extent of ITC reported and the cataloguing of its defaulting suppliers. This will help him raise accurate ITC claims.
6 New rule is surely going to impact a company’s working capital, businesses will need to invest additional time in managing their accounts payables more effectively.
7 It becomes vital for a business to regularly rconcile their purchase data between their books and the GSTR-2A, identify mismatches and communicate the same to their suppliers so that they upload the missing invoices. Frequent following-up with vendors needs to be managed.
8 A taxpayer could benefit by setting up an automated system of invoice tracking, with an in-built communication link with his vendors/suppliers. This will save effort, time and money in the long run.
9 Small suppliers who do not use a software for keeping track of provisional credit claimed/claimable will need to be vigilant, and install a mechanism where the same can be effectively monitored. There is no functionality currently available on the GSTN, however, the system can check where ITC exceeds the 20% limit and the AO may question and send notices where excess ITC has been claimed.