The Central Board of Indirect Taxes & Customs (CBIC) vide notification 49/2019 inserted a new sub rule 4 to rule no 36 which puts restrictions on the quantum of input tax that can be availed as “Eligible credit” in GSTR 3B filed from October 2019 onwards.

Following the extract of new sub rule inserted:

“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”

The above provision has been inserted to arrest dwindling tax collections and would impact all industries since it:

1. Requires reconciliation of input credits between 2A – 3B on real time/monthly basis
2. Increases compliance burden on the tax payer, &
3. Affects the cash flows of the tax payer due to disentitlement of credit.

Illustration for better understanding

Let us understand the provision with the help of an example for any month,

1. Total ITC on basis of supplier invoices – Rs. 1,000/-
2. Total ITC appearing on GSTR 2A – Rs.800/- (i.e. credit worth Rs. 200 does not appear on the return)

Total eligible credit for the month will be Rs.800 + 20% of Rs.800 = Rs.960/-. Thus, though the taxpayer has invoices worth Rs. 1,000 in credit, it would be eligible for only Rs. 960. The taxpayer would end up paying Rs. 40 more in taxes.

Clarifications issued by CIBC

After reading the above rule, following issues will arise and corresponding clarifications are issued by CBIC vide circular no.123/42/2019-GST dated 11^th November 2019:

1. Which are the invoices/debit notes that attract the above restriction?

Clarification: Restriction has been imposed only on “Invoice/debit notes” which are not uploaded by suppliers in GSTR 1. Therefore, full ITC in respect of IGST paid on imports, documents issued under RCM, credit received from ISD may be obtained without any restrictions.

1. Since GSTR 2A is a dynamic document, at what point in time it has to be downloaded for reconciliation purposes?

Clarification: 2A downloaded as on the due date of filing GSTR 1 shall be reckoned for reconciliation purposes, i.e. 10th mid-night.

1. Whether reconciliation to be made supplier-wise or on overall basis?

Clarification: On overall basis. All the ineligible/blocked credits are to be excluded.

1. What will happen to the ITC which is not claimed in a month on account of above restriction?

Clarification: It can be availed during the month in which the vendor uploads the invoice in his return. In case the invoices are uploaded by vendors are on instalment basis, the ITC shall be claimed proportionately. In continuation to the above example, if the remaining ITC of Rs.200/- has been uploaded by Vendor in the month of Dec 19, then Rs.40/- can be availed as “eligible credit” for the month of Dec 19.

Concluding remarks

These additional restrictions, though intended to protect interest of revenue from claim of fake input tax credits, impose additional responsibilities on tax payers to rigorously ensure and prove that input tax credits are availed from tax compliant vendors. The onus of proving this compliance is on the tax payer and therefore adequate documentation is required to be additionally maintained.

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