OCTOBER 17, 2019

By Rohini Aggarawal, CA

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.

[The author is Principal Consultant with ARX Bizness Advisors LLP and the views expressed are strictly personal. Assisted by  CA. Vipin Jain ]