OCTOBER 25, 2019

By Akash Mittal, Advocate

RECENTLY, CBIC has released Notification 49/2019-CT dated 9th October 2019 carrying out amendments in CGST Rules, 2017. Amongst the various amendments, one interesting amendment relates to insertion of sub rule (4) to Rule 36 of CGST Rules, 2017. The said Rule 36 relates to documentary requirements and conditions for claiming ITC. The said sub rule states-

"(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 percent 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."

It is pertinent to highlight that the said rule has been brought into force from 9th October 2019.

In light of the above, it can be said that the availability of input tax credit to recipient of supply has been made contingent upon uploading of invoices by the supplier in his GSTR-1. The newly inserted sub-rule provides that in case of missing invoices (i.e. the invoices not uploaded by the supplier), the recipient of supply can claim provisional input tax credit up to 20% of eligible credit of the invoices or debit notes reported by the supplier in GSTR-1.

The sub-rule has been inserted in view of Section 43A of CGST Act which was introduced by CGST Amendment Act, 2018. Notification No. 02/2019 – Central Tax [dated 29th January 2019] notified 1 February 2019 as effective date for the provisions of the CGST Amendment Act, 2018 except certain provisions relating to new returns procedure like Section 43A. Thus, till date Section 43A has not been brought in force. Enforcement of the rules prescribed in respect of base provisions that have not been made effective themselves is glaring as it raises doubt over the validity of the said sub-rule itself.

Ideally, Section 43A, relevant rule/s prescribed in that regard and New returns format [GST RET-01 with relevant annexures] should come together for implementation of such credit availment mechanism. The proposed new return format was envisaged to effectuate such unidirectional flow of data supplying credit to recipients and up till then, a registered person would continue to avail provisional credit on self-assessment basis and credit would not be denied if the supplier fails to furnish his outward details correctly within prescribed time. With deferment of the proposed new returns to April 2020, the general perception was to continue to enjoy the provisional credits in GSTR-3B with no worries of reconciliation of credit with invoices uploaded by suppliers. However, in view of the instant development, the issue of availability of credit basis the supplier's invoices have become alive again.

At this juncture, let us also analyse whether in view of the provisions of Section 16(2)(c) of CGST Act, input tax credit can be denied in case the supplier has not paid tax in respect of the subject supply. The referred provision requires that a registered person can avail the input tax credit if the tax charged in respect of the subject supply has been actually paid to the account of the Government. Notably, the validity of this condition has been challenged before the Delhi High Court and notice has been issued by the Court to the Government in the case of Bharti Telemedia Ltd. Vs. Union Of India, W.P.(C) 6293/2019.

Though the validity of the said sub-rule remains questionable, let us assume it to be valid and since the same is in forcelet us understand the implications/issues relating to the introduction of the sub-rule that has reignited the viscous circle of credit for taxpayers.

There is lack of clarity in implementation of the said rule as at present there is neither any system of matching of invoices nor any prescribed mechanism to calculate the said '20% of eligible credit'. Now firstly, what is the meaning of the term 'Eligible credit'? Whether it includes eligibility in accordance with both section 17(2) of the CGST Act and 17(5) of the CGST or only the Section 17(5) of the CGST Act. A possible reasoning to this could be that reversal of credit under Section 17(2) of the CGST Act is done subsequent to availment of credit , accordingly a view may be taken that only the ineligible credit under Section 17(5) of the IGST Act has to be considered.

Another fundamental challenge that the industry may face then is when to compute the said 20% and how? Whether the computation of 20% threshold has to be seen monthly or financial year wise? Further, no cut-off date for matching the invoices has been prescribed. Whether matching of all invoices has to be done for the credit claimed for present month and pertaining to previous tax periods?

Also, it must be noted that GSTR 3B for the month of September is crucial as it is the last date for claiming the credit for Financial Year 18-19. If the invoices of previous tax period have to be traced and recipient is unable to trace the missing invoices in GSTR 2A for previous financial 18-19, the opportunity to claim the same may be lost. One may take a call to allocate the 20% of the provisional credit towards the invoices pertaining to Financial Year 18-19.

What will happen in cases where the credit pertaining to missing invoices is more than 20% of the eligible credit? Unlike proposed FORM RET-01 there is no functionality for recipient to upload the details of the missing invoices of the supplier. Another issue that may arise, incase the provisional credit claimed against the missing invoice is not uploaded by supplier in subsequent tax periods? Will the credit eligibility in terms of Section 16 of the CGST Act be questioned? Will it trigger the reversal of such credit while filing the annual return?

In situations where invoices have been uploaded by the supplier in next month GSTR-1, will the said invoice be then considered for eligible credit? Other possible questions may also arise as to whether wrong invoices uploaded by the supplier have to be considered for the purpose of computing the credit or invoices with errors in uploading details like the invoice number can be a ground for disregarding the credit?

In absence of defined guidelines outlining the said issues that may crop due to insertion of the said sub-rule,there is a need for clarificatory circular that explains the mechanism or approach to be adopted for implementing the said change. Until then, business must start reconciling the credit that they expect to avail this month!

[The author is Associate, Lakshmi kumaran & Sridharan, New Delhi and the views expressed are strictly personal.]