New Rule 36(4) to further Complicate GST (Part – I)

 

Recently introduced Rule 36(4) in the CGST Rules is the most controversial & hot issues amongst the businessmen. In an attempt to control the instances of fake invoices, fraudulent credits, non compliances by the GST registered person, New Rule 36(4) has been brought in the GST Law vide Notification No. 49/2019 Dated 9^th Oct 2019 which reads as under:  

‘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 20 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.’

Now, buyer can avail Input Tax Credit (ITC) only if the suppliers have not only paid the amount to the exchequer but have also filed & incorporated it in their GSTR-1 returns (i.e., Return to be filed by the seller). GST credit is subject to its availability in the GSTR-2A (input/purchase data) of the buyer. GSTR-2A is auto populated data of the purchaser which is generated on the basis of GSTR 1 return filed by the supplier. In short, if the seller is not filing the GST returns then the buyer will not be able to get the credit of GST.  In such cases, GST would purely be the part of the cost of purchases.

20% Benefit towards credit not available in GSTR – 2A:

Leverage of 20% is given if the entire ITC is not reflected in the GSTR 2A. It means that GST credits in respect of unmatched purchases can be taken to the extent of 20% of credit as appearing in GSTR-2A. For example, in the case of X Ltd, Credit as per Books of accounts is Rs. 1,000/- whereas credit appearing in GSTR-2A is Rs. 400/- &. In such scenario, GST Credit which can be claimed by X Ltd would be Rs. 400/- + Rs. 80/- (i.e., 20% of credit of Rs. 400/- as appearing in GSTR-2A of X Ltd) = Rs. 480/-. Balance of Rs. 520/- is required to be deferred. From accounting perspective, it needs to be transferred to ‘Deferred GST A/c’ in current assets.  For computing the ceiling of 20%, following credit cannot be considered:

1. Inward supplies used exclusively in providing the exempted supply,
2. Inward supplies partly used for exempt supply,
3. Inward supply partly used for non-business purpose.
4. Credit restricted under section 17(5) of CGST Act,2017,

Benefit of 20% credit is available on consolidated basis & not each supplier-wise. Further, Taxpayers can avail full ITC of those invoices which are not required to be reported in Form GSTR-1 like IGST paid on import, documents issued under RCM, credit received from ISD, etc.

Logic behind introduction of Rule 36(4)

It is said that the restriction on availing ITC by the purchaser is totally arbitrary and unjustified. It is like punishing the purchaser for no faults or penalising the purchaser for the mistakes of the seller in non-filing or erroneous filing.

Here, it must be noted that section 16 of the CGST Act-2017 reads with rule 34 & 37 of CGST Rules2017 deals with Eligibility and Conditions for availability credit towards ITC on inward supply of goods and services. Sub section (2) to section 16 already restricts the admissibility of credit if the supplier has not paid the tax to the Government Treasury or has not furnished the return u/s 39. In short, prior to Rule 36(4) also, GST law was never in favor of allowing the credit without it being paid & its returns being filed by the seller. Present Rule 36(4) is a machinery provision to ensure its implementations as envisaged by section 16.

The new rule has created storm for the businessmen & tax-consultants and would adversely impact the “ease of doing business”. It’s an attempt to relieve the GST Department from compliance burden & shift all the onus of return filing of seller on to buyers. Compliance with the Rule 36(4) would result in heavy clerical burden, not only on the business houses but also on their consultants. Rather than constructive work, New Rule 36(4) will make the industries to concentrate on unproductive work of endless reconciliation and rigorous follow-up. In short, Compliance with Rule 36 (4) is a daunting task as it has totally shifted the compliance burden on the buyers. In the next issue, we will discuss the Key features & major issues involved as a result of new rules.

   (Contd..)

[Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]