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Cumulative adjustment in Rule 36(4) - retrospective?

APRIL 20, 2020

By Jigar Doshi & Pratik Shah

IN the backdrop of COVID-19 pandemic, the Indian government announced an array of relief measures including a few from GST perspective. On April 3, 2020, the Central Board of Indirect Taxes (CBIC) has issued multiple notifications with the objective of providing a breather to the taxpayers from the innumerable GST compliances. Amongst these Notifications, Notification no. 30/2020-CT dt. 03.04.2020 (referred as said Notification) was issued which inserted the following proviso in Rule 36(4) of the CGST Rules, 2017 -

"Provided that the said condition shall apply cumulatively for the period February, March, April, May, June, July and August, 2020 and the return in FORM GSTR-3B for the tax period September, 2020 shall be furnished with the cumulative adjustment of input tax credit for the said months in accordance with the condition above.".

It is a well-known fact that, Rule 36(4) of CGST Rules, 2017 has been in news lately for all the wrong reasons. As if the GST compliances were not already complicated enough, in October 2019, the CBIC inserted sub-rule 4 to Rule 36 of CGST Rules, 2017 [49/2019-CT dt. 09.10.2019] wherein the Input Tax Credit (ITC) claimed was restricted to the extent of 10% [75/2019-CT dt. 26.12.2019] (20% from October 2019 to December 2019) of the eligible credit available in the GSTR 2A (i.e. ITC in respect of invoices or debit notes, the details of which have been uploaded by its suppliers).

Post amendment, the taxpayer was supposed to put the remaining ITC pertaining to the invoices and/or debit notes not uploaded by the supplier in abeyance and could only claim this credit when the respective invoices or debit notes were actually uploaded by the supplier. In common parlance, the ITC claimed in GSTR 3B should not be exceeding 110% of the ITC reflected in GSTR 2A to be checked on the due date of filing of GSTR 1 of the same month itself.

Well, it is as complicated as it sounds; therefore, let's understand by way of a numeric illustration:

ITC available as per books of accounts (GST on inward supplies) = 100

ITC appearing in GSTR 2A (GST as per the returns uploaded by suppliers) = 70

ITC available as per amended Rule 36(4) = 77

ITC in abeyance (temporarily on hold) = 100-77 = 23

Hence, as per the above example, while the taxpayer was eligible to avail the provisional ITC of Rs 100/- before the amendment, it comes down to Rs. 77/- post amendment. After the amendment was brought in effect, there was a lot of hue and cry and multiple writs were filed against this amendment in various High Courts alleging this amendment to be ultra vires the law (on the reasoning that Rule 36(4) is subordinate to Section 16 of the CGST Act, 2017 and Section 16 does not cap availment of ITC in a situation where the invoices are not uploaded by the supplier). The current situation on the matter is that various Writs have been filed to counter the validity of the said Rule.

The endurance became even further painful when the said Notification was introduced to relieve the taxpayers from the compliance of calculating 10% ITC as given under Rule 36(4) of CGST Rules, 2017, which I believe was unnecessary in the first place.

The recent Notification has added a proviso (as mentioned and extracted earlier) which implies that for the months of February through August 2020, Rule 36(4) will be applied cumulatively instead of the monthly drill and the adjustments, if any, will be done in the month of September 2020. Though the Notification has the right intent to provide aid to small taxpayers who must be facing cash crunch and working capital issues owing to the slowdown, it has apparently not provided the succor as intended, as can be seen from the suceeding discussions.

The industry seems to have a divided view of the said Notification. The first school of thought reads the Notification in strict construction and interprets that though the capping of 20% of ITC was brought in by CBIC in October 2019 [later capped at 10%, in December 2019], the relief of cumulative adjustment only applies from February to August 2020 owing to the extraordinary situation. Therefore, for the months of October to January 2020, monthly computations and compliances with respect to Rule 36(4) remain unchanged as done in the past.

Conversely, the second school of thought, and a rather aggressive one is interpreting the said Notification to be applicable retrospectively; i.e. from October 2019 onwards. So, as per this school of thought, the capping of 20%/10% ITC should be done cumulatively for the period October 2019 to August 2020 and the necessary adjustments would be carried out in September 2020.

It is noteworthy that this Notification came on April 3, 2020 and the due date to file the GSTR 3B for February 2020 had already elapsed. Therefore, the industry must have complied with 10% ITC capping for February 2020. However, for the month of March, we are already at the due date and this ambiguity may prove to be alarming as the businesses may take different views and claim ITC (kept in abeyance) retrospectively i.e. claim the unclaimed credit in March month whether or not it is appearing in GSTR 2A.

The need of the hour calls for CBIC to clear the air around the issue so that the industry doesn't miss the bus by filing appropriate returns.  

[The authors are Founding Partners of TTMS LLP (known as TMSL) and the views expressed are strictly personal.]

(DISCLAIMER : The views expressed are strictly of the author and doesn't necessarily subscribe to the same. Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)



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