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


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

In the last issue of The Tax Talk, we have discussed about Rule 36(4) which has indirectly shifted the onus of ensuring payment & filing of GST Returns by the seller on to the buyer. Instead of penalizing the non-compliant taxpayers, harsh provision is imposed on the genuine, innocent buyers. Non-payment or non filing of GST return by the seller will result in denial of GST credit to the buyers. Only relief is in the form of leverage up to 20% of eligible GST credit to the buyer during the intervening period. Key features & major issues involved as a result of new rules are as under:

  1. Rule 36(4) has nothing to do with the genuineness of the transactions. Even if the buyer has paid the amount to the supplier who is not depositing the amount in the Government Treasury, still the buyer would be denied the benefit of ITC.
  2. There are no effective steps that apparently will be taken by the GST department to first recover GST from the seller and not the buyer. New Rule 36(4) is shifting the onus of ensuring tax compliances & tax collection for the exchequer from the seller to the buyer.
  3. New Rule will make taxpayers to file the GST returns at the last date as most of the purchases will be available in GSTR-2A by that time. It will create a vicious circle of last moment filing of GST Returns.
  4. GSTR- 2A is a dynamic document which keeps on changing and so the calculation of 20% will also keep changing month on month basis as supplier has right / option to amend invoices. It would often result in revised working of 20% whenever there are changes in GSTR-1 of the any supplier.
  5. Restriction under Rule 36(4) is not imposed through the common portal and it is responsibility of the taxpayer to ensure the compliance on self-assessment basis.
  6. Working for 20% of ITC is required to be done on monthly basis whereas lot many persons are allowed to file the GST Returns on quarterly basis. Result: Purchasers would be denied the benefit of ITC even if the seller is tax compliant and timely filing their GST returns on quarterly basis. Buyers now would be required to know the periodicity of the supplier to avoid the capital blockages.
  7. This Rule would lead to additional compliances for the companies such as every Month reconciliation of GSTR-2A with Purchase register, follow up with suppliers /Vendors etc.
  8. If goods are in transit then condition of section 16 doesn’t fulfill & hence its ITC cannot be claimed even if they are appearing in GSTR-2A.
  9. New Rule is like penalising the bonafide buyer by disallowing his eligible credits on account of non-compliance by the supplier.
  10. Restriction imposed in Rule 36(4) will certainly impact working capital of taxpayers as they must pay more taxes when suppliers file belated returns in Form GSTR-1.It’s like penalizing the genuine buyer at the cost of non-compliant supplier.

The procedure to be adopted for working out 20% credit would be tough task as it will involve the following working:

  1. Verification of invoices/ debit notes as reflected in GSTR-2A vis a vis Purchase register.
  2. Wrong Invoices or debit notes reflecting in GSTR-2A
  3. Invoices or debit notes against which ITC is availed in GSTSR-3B but invoices or debit notes are not reflected in GSTR-2A.


  1. Rule 36(4) is draconian provision & its compliance is a daunting task. Rather than constructive work, Business houses would be required to move on with unproductive work of endless reconciliation and rigorous follow-up. Needless to say, GST authorities could have better control over the seller as compared to the buyers.
  2. New scheme of GST returns forms is likely to be operational from April-2020 which will probably simplify the GST regime & may make Rule 36(4) redundant. It will be in the interest of business if GST council abolish Rule 36(4) ab-initio.
  3. Admittedly, GST credit is governed by the section 16 which allows the  GST credit to the buyer only if the seller has paid the amount to the exchequer and filed the GST return. But, it would be in the interest of the business if the Department (a) first resort to tax recovery from the seller whose is under first obligation to pay the tax and (b) turn on to the buyer only the required action against seller has exhausted.

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