IN the Goods and Services Tax regime,
the major cause of disconnect in implementation and administration is that the
law as provided in the legislation
is not appropriately aligned with the
respective procedures. The gravity
or the concerns further get enhanced by unthoughtful
notifications tweaking the
procedures without appropriate alignment with the law.
The latest in this series is Notification No. 49/2019-CT, dated 09-10-2019. This
notification places a maximum cap on the amount of ITC available to an assessee
in a given tax period which is usually a "month". Accordingly, a
person can avail maximum ITC on his total purchases to the maximum extent of
the respective supply details furnished by the suppliers in GSTR-1 PLUS 20%
thereof. This notification is made effective from 09-10-2019.
The present mechanism of furnishing details of outward supplies
by the
suppliers is emanating from Section 37 of the Central
Goods & Services Tax (CGST) Act,
2017. This particular section does not give any room for limiting the ITC
availability based on the supply details furnished by the supplier. Section 42 of the Act deals with
the mechanism of matching and reversal of ITC, it gives a comprehensive
mechanism for matching the ITC in case of outward supplies, inward supplies
under RCM, and imports. The respective procedures though could not be
implemented fully because of technical reasons but whatever procedures could be
implemented for ITC are in line with the given mechanism.
A notable point is that - Sections 37 or 42 or any other section of
the Act apart from section 43A (where again this restriction could be placed as
part of certain procedures only) does not empower the government to place any
restriction on the amount of eligible credit based on the amount of uploaded
invoices unless the given procedure was followed.
Despite this legal position, the recent notification no. 49/2019-CT has
introduced sub-rule (4) to Rule 36 of the CGST rules restricting the ITC
availability to a person to the maximum extent of 20% above the supply details furnished by
his supplier(s) even though the ITC based on the actual invoices received by
him may be much higher (hereinafter referred as 'restriction of 20% on
ITC). The sub-rule 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 we proceed to have a look at the possible genesis of the thought
of placing restriction of 20% on ITC as mentioned above. It seems to be
coming from Section 43A of the CGST Act, 2017 which was introduced by the GST
Amendment Act, 2018, but which is yet to come into force. This section is practically providing a new mechanism for
filing detail of outward supply and claiming ITC. Even under section 43A, this
kind of restriction cannot be placed on standalone basis, it has to be a
part of the procedure for uploading the
details and the subsequent related procedures.
Section 43A(4) is cited below in context of the discussion about restriction on ITC.
"The procedure for
availing input tax credit in respect of outward supplies not furnished under
sub-section (3) shall be such as may be prescribed and such procedure may
include the maximum amount of the input tax credit which can be so availed, not
exceeding twenty per cent. of the input tax credit available, on the basis of
details furnished by the suppliers under the said sub-section."
A plain reading of the above provision indicates that - first, a
procedure has to exist for furnishing details of outward supplies under Section
43A(3); then only in a given consequent situation, a procedure for availing ITC
pertaining to non-furnished supply details may be prescribed which can limit
the ITC availability to 20% of the furnished supply details. The notable point
is that the restriction of 20% is a part of an entire mechanism which may come into force on 01-04-2020.
An interesting position is
that the restriction on ITC which is allowed to be placed under section 43A as a part of the new mechanism of
return filing and ITC availment has been placed by Notification No. 49/2019-CT with
reference to Section 37, as a part of the
existing return filing and ITC availment mechanism, without
considering the legal, procedural or practical implications thereof.
Having discussed that the legal positioning of restriction of 20% on
ITC is subject to doubts, the related procedural aspects are also full of
anomalies and confusions. The said restriction has been placed as a standalone
criteria for ITC without considering the fact that ITC claim is to be computed
based on many other criteria and involve many other procedures all of which
need to be aligned with this
'restriction' in order to make it
procedurally rational and workable.
While making change in the rule 36 of the CGST rules, probably
this thought was not entertained.
Some instances where the existing law and procedures may not be
appropriately aligned with the rule
relating to restriction of 20% on ITC are cited below:
- ITC
is availed through GSTR-3B which is a monthly return by a supplier, while the supplier having less
than 1.5 crores turnover will file GSTR-1 quarterly (furnishing their supply
details), how the 20% cap shall apply in this situation would need to be prescribed through a separate procedure.
- A
restriction of 20% on ITC being only one
small procedure in the entire
mechanism of ITC availment, this
would require a corresponding change in many other procedures and rules. For instance, rules 42 & 43 of CGST Rules, 2017 do not contain
any reference to any reversal of ITC on
account of 20% restriction.
- Restriction
of 20% on ITC is to be computed based on the supply details furnished by the
supplier without considering the fact that there could be much more ITC on account of GST paid by the recipient under
reverse charge mechanism for which
the ITC is allowed based on
the tax invoice issued by the recipient itself; or the ITC on account of Bill of Entry where it is in respect of goods
imported into India. The way the sub-rule is constructed, the maximum available
ITC would get restricted based on invoices uploaded by supplier despite ITC
being principally available based on Bill of Entries and Reverse charge Invoices.
These are only few instances where restriction of 20% on ITC does not get
aligned with the existing mechanism of the returns and ITC
in the GST. There could be many more.
Now coming to the practical aspects of GST in practice for past
about two and a half years. It is well known
to the Government that in the
existing return filing and ITC systems and procedures, the suppliers have not been appropriately
uploading their supply invoices even though they might have paid taxes in full.
This may be due to non-awareness or other accounting reasons. As the Government
did not want buyers to suffer for the passivity of the suppliers, they have
been categorically allowing the refund of ITC to the assessees based on their
purchase invoices even if they are not
uploaded on common portal by the suppliers. A sudden restriction on ITC based
on the invoices uploaded by the suppliers will be a complete 'U turn' in the
procedure without any corresponding changes in the ITC or return filing mechanism. This will directly hit the
businesses impacting their cash flows hugely.
The businesses with whom genuine purchase invoices are available but
who are not able to take ITC because suppliers have not uploaded
them would be left with no mechanism to claim
ITC on their genuine purchases or
to enforce the suppliers to upload the invoices.
Even the government has not placed any mechanism which can push the
suppliers to upload the invoices - such mechanism may be there only when the
ITC mechanism envisaged under
section 43A would be completely
constructed and made workable. In the past also such mechanism could not be made workable because of technical
reasons even though it was envisaged under section 42 based on matching
concept. In fact, the Government gave relaxations to claim ITC without online
matching because they were well aware that unless a complete mechanism takes
care of the entire chain of supply and purchase invoices, the ITC cannot be
restricted if evidence for genuine purchases was available with the buyer. A sudden shift in the approach in
this regard would
unsettle the settled position.
The above discussion can be summarized highlighting the following
points:
- Restriction
of 20% on ITC placed by way of
introducing Rule 36(4) of the CGST Rules, 2017 is not backed by the appropriate
authority of law as section 37 or section 42
of the CGST Act, 2017, do not allow
any such restriction.
- Section
43A has envisaged about restriction of 20% on ITC as a part of complete set of procedures where the procedures for furnishing 'supply detail' would have pushed the suppliers for filing the complete
details. The related mechanism is likely to be implemented by 01-04-2020 only.
- The
restriction of 20% on ITC has been placed as a standalone procedure without
considering that such tweaking in the procedure of taking ITC would also
require corresponding changes in the rules and procedures in holistic manner.
- The
restriction of 20% on ITC is in complete contradiction to the existing stand of
the government to allow refund of ITC based on genuine tax invoices or
debit notes available with the buyers. This move will hit
the industry severely.
- Denying
genuine ITC to a buyer for the
passivity of supplier(s) that too when buyer is left with no mechanism to prove
the validity of his ITC claim or to push the supplier to upload his invoices on common portal is against the basic principles of taxation.
Seamless ITC is the
backbone of GST Law. The restriction
of 20% on ITC in the manner it is placed
by notification no. 49/2019 has a potential of breaking the backbone.
The restriction is neither backed by
appropriate authority of law, nor aligned with other procedures of GST, nor in line with
the principles of good taxation, and would put the industry in distress.
An urgent attention is required to
review the introduction of this unthoughtful 'restriction' for good of all
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