Restriction on Input Tax credit for Mismatch in GSTR 2A - An Analysis.

Capping of ITC to 20%: Analysis of CBIC Circular No.

123/42/2019– GST dated 11.11.2019

Introduction

The Central Government has inserted a new sub-rule (4) to Rule 36 of CGST Rules, 2017 vide Notification No. 49/2019 – Central Tax dated 09.10.2019. As per new rule 36 (4), the input tax credit (ITC) in respect of invoices and credit note not uploaded by the supplier in their respective GSTR-2A shall be capped to 20% of the eligible input tax credit. Effectively, the registered person can claim entire ITC of amount reflected in his GSTR-2A and up to 20% with regard to ITC not reflected in GSTR-2A.

Rule 36(4) inserted in the CGST Rules, 2017 reads as below:

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 in their GSTR-1 under section 37(1), 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 section 37(1).

In the earlier article, I have tried to analyze the notification, legal lacunas and practical aspects in implementing the rule. There were lot of loose ends in the Notification no. 49/ 2019 (supra) as many issues such as the method of calculating this 20% amount, the cut-off date, whether 20% to be calculated supplier-wise or consolidated basis and so on was left unanswered.

Therefore,       CBIC     has     issued     Circular       No    123/42/2019-GST         dated     11^th November 2019 in order to clarify all these aspects.

Synopisis of the Circular

1.     The restriction is not imposed through the common portal but it is the responsibility of the taxpayer that credit is availed in terms of the said rule. Therefore, the availment of restricted credit in terms of rule 36(4) of CGST Rules shall be done only on self-assessment basis by the tax payers.

2.   The restriction of availment of ITC is imposed only only in respect of those invoices/debit notes which are to be uploaded in GSTR-1. Therefore, the

restriction is not applicable for import, documents issued for RCM, credit received from ISD provided other conditions in section 16 and 17 are satisfied.

3.   The restriction will be applicable on invoices/debit notes, on which ITC is availed after 9th October, 2019.

4.  The 20% cap on the eligible Input Tax Credit will not be calculated supplier- wise and GST payers can avail the input tax credit on a consolidated basis every month. Further, it is clarified that calculation has to be based on invoices eligible u/s 16 or 17. Accordingly, those invoices on which ITC is not available under any of the provision would not be considered for calculating 20% of the eligible ITC.

5.   The 20% of the eligible ITC shall be calculated on those invoices/debit note details of which are uploaded by the supplier in Form GSTR-1 as on due date u/s 37(1) i.e. 11^th of succeeding month (for monthly tax payers) i.e. details of such invoices available in Form GSTR-2A of the recipient as on the due date of filing of GSTR-1 has to used for calculating 20% restriction.

6.   The balance ITC may be claimed by the taxpayer in any of the succeeding months provided details of requisite invoices are uploaded by the suppliers. i.e. proportionate ITC can be claimed as and when details of some invoices are uploaded by the suppliers until details pertaining to invoices/debit note amounting to 83.33% of the total ITC are uploaded by suppliers.

7.    Once details pertaining to invoices/debit note amounting to 83.33% of the total ITC are uploaded by suppliers, full ITC in respect of that tax period can be taken.

Recommended course of action for each month

1.     The registered person has to extract the ITC register each month from ERP and bifurcate ITC claimed on account of import, RCM, ISD etc.

2.     The remaining ITC has to be reconciled with GSTR-2A (taken on 11^th of succeeding month) and compare the data with B2B, B2BA, CDNR, CRNRA

3.     All the matched entries as per the above step to be separated.

4.     The unmatched ITC may be-

a.      ITC reflected in books not available in GSTR-2A

b.     ITC reflected in GSTR-2A not in books (either ineligible credits or credit not pertaining to recipient)

5.       Eligible ITC shall be lower of :

a.      ITC as per step 2

b.     120% of matched invoices as per step 3

6.     Total ITC to be taken in GSTR-3B = is ITC as computed in step 5 + ITC on account of import, RCM, ISD, etc.

Unmatched ITC

The registered person has to be maintain a list of unmatched ITC for each month. Form GSTR-2A, being dynamic, will get continuously updated. Therefore the balance credit (as 20% is taken provisionally) can be taken as and when such invoices are uploaded by supplier. This exercise has to be calculated until 83.33% of total ITC of particular tax period has been reflected in GSTR- 2A.

To illustrate, Suppose in the month of October Mr.R has Rs.1,00,000 as total ITC. Suppose only Rs. 70,000 is reflected in GSTR-2A as on 11^th November, he can claim only Rs.84,000 ( Rs.70,000 + 20% of Rs.70,000= Rs.14,000).

Suppose as on 11^th December, ITC of Rs.10,000 is further uploaded by supplier, Mr.R can avail only Rs.5,333 ( 10,000 * 16,000/30,000) being the proportionate credit.

Suppose as on 11^th January, further ITC of Rs.10,0000 is uploaded by supplier, Mr.R can avail the entire balance credit of Rs.10,667.

Open Issues

1.      Undue workload- For every tax period, separate reconciliation has to be prepared and list of unmatched entries has to be identified. This unmatched entries for that particular tax period has to be updated every month until 83.33% of total ITC for the particular month is matched. i.e. In October, reconciliation is to be done. In November, Reconciliation for November is to be done plus unmatched entries in October has to be updated. This will go on and on...

2.      Delayed uploading of GSTR-1 - As per the circular, GSTR-2A as on due date of filing GSTR-1 i.e. 11^th of succeeding month is to be taken for reconciliation. Therefore, ITC on those invoices uploaded suppliers who file GSTR-1 belatedly will not be available for matching. Regular follow up has to be made with supplier after 5^th of succeeding month to ensure that they file GSTR-1 in time.

3.      Due date for generating GSTR-2A – As per the circular, GSTR-2A as on due date of filing GSTR-1 ie 11^th of succeeding month is to be taken for reconciliation. However, GSTR-2A being a dynamic document will continuously get updated each time it is generated. Some suppliers may upload invoices at 9:00 Am, some at 12:00, some at 10 PM. Therefore, there is no standard time for downloading GSTR-2A. Further, GSTR-2A does not have any date of download, which means if a person is unable to download on 11^th day of succeeding month say due to system issue, he will not be download the same GSTR-2A again subsequently.

4.      Suppliers uploading on quarterly basis – There will be delayed credit availment as taxpayers below Rs. 1.5 Cr file GSTR-1 on a quarterly basis. The details of such invoices will be reflected in GSTR-2A only on the 31^st day of the month succeeding the quarter.

Conclusion

The new rule 36(4) cast a dual responsibility on each registered person. Firstly, upload the details of his outward supplies in Form GSTR-1within 11^th of succeeding month so that his customers can enjoy the full ITC.  Secondly, follow up with his supplier to make sure he uploads the details within 11^th day so that he can enjoy the full ITC.

While the circular has addressed many of the issues, some technical changes has to be brought in the system considering the fact that GSTR-2A is highly dynamic.

It is best recommended in the interest of all stakeholders that the Government defer the ITC capping until the new return system is rolled out.