This is further to our previous post, we have tried
to analyze the implication of new sub-rule 36(4)
to block a large portion of unreconciled/mis-matched input credit .
1.
The amendment
The following sub-rule has been inserted as Rule
36(4):
“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 sub-rule effectively seeks to restrict the
ITC in respect of invoices/debit notes not uploaded by seller/supplier in Form
GSTR-1 (and which consequently does not appear in GSTR-2A) to the extent of 20%
of eligible ITC in respect of invoices/debit notes uploaded by seller/supplier
in GSTR-1 (which is expected to appear in GSTR-2A).
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Illustration 1: If:
·
an assessee has a total input credit of Rs 180, of which Rs
100 is duly reflected in its GSTR-2A
·
but the remaining Rs 80 is not reflected in GSTR-2A/yet to
be reconciled
the assessee can
only avail a total credit of Rs 120 - full credit of the Rs 100 (assuming
other credit availment conditions are met) plus credit of Rs 20 from the Rs
80 (equal to 20% of the first Rs 100); ITC of Rs 60 (80-20) will be
deferred.
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Illustration 2: If:
·
an assessee has a total input credit of Rs 110, of which Rs
100 is duly reflected in its GSTR-2A
·
but the remaining Rs 10 is not reflected in GSTR-2A/yet to
be reconciled
the assessee can
avail the full credit of Rs 110 - full credit of the Rs 100 (assuming
other credit availment conditions are met) plus credit of Rs 10 from the
mismatched basket, being below the cap of Rs 20 (equal to 20% of the first Rs
100).
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2.
Implications of this new rule:
(i)
Deferment
of ITC, as explained above
(ii)
Mandatory
reconciliation every month (or at least quarterly/annually, with potential
interest implications) between GSTR-2A and invoices received – this may involve rigorous follow-ups/coordination
with suppliers
(iii)
Assessees
who are retailers or in the lower levels of supply
chain especially in FMCG or other customer facing sectors may also face issues
where their suppliers may inadvertently report B2B transaction as B2C as a
result of which invoices/debit note may not appear in GSTR-2A of the recipient.
The time lag to amend the same by the supplier may result in blockage of funds
for the recipient.
(iv)
Practical
difficulties/ambiguities
a)
Since
GSTR-2A is auto-populated on the basis of the corresponding FORM GSTR-1, in
case of late filing of GSTR-1s by suppliers there would be a mis-match between
the updated FORM GSTR-2A and the actual invoices for a given period, making it
difficult to reconcile both
b)
For
supplier-assessees with turnover below Rs.1.5 crores, GSTR-1 is to be filed
quarterly. However, since ITC is to be availed by recipient-assessees each
month in Form GSTR-3B, it would be impossible to reconcile monthly invoices
with GSTR-2A (as it would be updated only after the said quarter)
c)
When suppliers
report invoice/debit notes in the subsequent tax period, whether this amount
will form part of eligible ITC for the reported tax period for calculation of
20%?
3.
Legal backdrop to this new Rule:
Clearly, this new Rule overturns the earlier
beneficial press release dated 18.10.2018 which clarified: “It is
clarified that the furnishing of outward details in FORM GSTR-1 by the
corresponding supplier(s) and the facility to view the same in FORM GSTR-2A by the
recipient is in the nature of taxpayer facilitation and does not impact the
ability of the taxpayer to avail ITC on self-assessment basis in consonance
with the provisions of section 16 of the Act”. However, despite
the above press release, practically, the tax authorities so far seemed to be
of the view that any input credit not duly reflected in GSTR-2A cannot be
availed; in fact several show cause notices have been issued in the recent past
alleging availment of excess credit wherever there have been mismatches between
GSTR-2A and GSTR-3B of an assessee.
This amendment may be driven by the recent stay order
from the Andhra Pradesh High Court in the writ filed by Royal Sundaram General Insurance
Company Limited against a show cause notice (SCN) issued proposing recovery
of ITC u/s 74 of CGST Act, 2017 and APGST Act, 2017 due to mismatch between
details in Form GSTR-2A and Form GSTR-3B. One of the arguments taken by the petitioners in
this case was that such an SCN was premature in as much as the SCN seeks to
recover alleged excess credit from the petitioners for mismatch even though
claim for such mismatch could only be made apropos Forms GSTR 2 and 3 and Forms
GSTR 2 and GSTR 3 are not even operational. The Andhra Pradesh High Court seems
to have found prima facie merit in this petition and granted an interim
stay against the SCN. This amendment, it appears, is an attempt to pre-empt
such arguments being replicated in writs all over the country – now that the
restriction will flow independently from this newly introduced Rule 36(4).
4.
Legal/Constitutional arguments against this new Rule
The following key legal arguments exist which can be
used (along with other arguments) to challenge the Constitutional validity of
this new Rule in a writ petition:
(i)
This
new Rule is unreasonable and arbitrary - how can the recipient’s
credit eligibility be dependent on someone else’s (namely, the supplier’s) acts
or omissions which are not in control of the recipient? In fact, this argument
has already been raised by is in a writ filed before Delhi High Court by Bharti
Telemedia while challenging the Constitutional validity of Section 16(2)(c)
of the CGST Act inter alia on the grounds of arbitrariness and
unreasonableness (Disclosure: this writ has been conceived and is being
handled by Advaita Legal before Delhi High Court)
(ii)
This
new Rule does not distinguish between bona fide
cases where a mismatch is due to any act/omission of the supplier and mala
fide cases where bogus/fraudulent credits are sought to be claimed through
collusion between supplier and recipient, thus violating Article 14 of the
Constitution of India (by treating un-equals equally). The Delhi High
Court judgments in the context of similar provisions under VAT laws in the
cases of Arise India Limited and Quest Merchandising India Pvt Ltd (now
effectively ratified by the Supreme Court which refused to interfere) may be
relied upon to buttress this argument
(iii)
When the
provisions of CGST Act, 2017 under sections 16 and 17 do not provide for
such an embargo and the invoice-matching provisions contained in sections 41,
42, 43 and 43A has been suspended as Form GSTR-2 is not operational, a rule
making power cannot be invoked for such restrictions – it is well-settled
that a rule cannot over-ride the provisions of the legislation.
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