Roadblocks to Diversion – seamless flow of ITC a distant dream

Introduction

The Finance Bill 2022 is yet to be passed by both the houses of the Parliament and receive Presidential assent to become the ‘Finance Act, 2022’. Although, for the changes in the CGST Act, additionally, notifications would be required to make them effective. Amendments to notifications under CGST or IGST would be applicable once the Bill becomes an Act.

Changes in Section 16, 38, 37, 41, 43A, (omitted) and section 50(3) have been covered below. There are other amendments in the Budget which have not been covered in this article. 

Restrictions & Conditions to avail ITC

Section 16(1)(ba) – the details of input tax credit in respect of the said supply communicated to such registered person under section 38 has not been restricted

Section 38 –

(1) The details of outward supplies furnished by the registered persons under sub-section (1) of section 37 and of such other supplies as may be prescribed, and an autogenerated statement containing the details of input tax credit shall be made available electronically to the recipients of such supplies in such form and manner, within such time, and subject to such conditions and restrictions as may be prescribed.

(2) The auto-generated statement under sub-section (1) shall consist of––

(a) details of inward supplies in respect of which credit of input tax may be available to the recipient; and

(b) details of supplies in respect of which such credit cannot be availed, whether wholly or partly, by the recipient, on account of the details of the said supplies being furnished under sub-section (1) of section 37,––

(i) by any registered person within such period of taking registration as may be prescribed; or (Rule shall prescribe the time limit beyond which if the supplier declares the details of revised invoice in his GSTR1, ITC cannot be taken)

(ii) by any registered person, who has defaulted in payment of tax and where such default has continued for such period as may be prescribed; or (Where the supplier has filed GSTR1 but not filed GSTR 3B within the time specified, which is yet to be prescribed)

(iii) by any registered person, the output tax payable by whom in accordance with the statement of outward supplies furnished by him under the said subsection during such period, as may be prescribed, exceeds the output tax paid by him during the said period by such limit as may be prescribed; or (Where the tax liability declared in GSTR1 for the specified period is more than the tax discharged in GSTR 3B for the said period by such amount as may be prescribed)

(iv) by any registered person who, during such period as may be prescribed, has availed credit of input tax of an amount that exceeds the credit that can be availed by him in accordance with clause (a), by such limit as may be prescribed; or (Where the supplier has availed the ITC for the specified period in excess of eligible ITC as per GSTR 2B by specified amount which is yet to be prescribed)

(v) by any registered person, who has defaulted in discharging his tax liability in accordance with the provisions of sub-section (12) of section 49 subject to such conditions and restrictions as may be prescribed; or (The legal backing for Rule 86B, i.e., 1% cash liability mandatory subject to certain conditions, has been now provided in sec 49(12) and linked to ITC claim)

(vi) by such other class of persons as may be prescribed.

* Note: Wherever the term ‘as may be prescribed’ is used, the CGST Rules against the same are not yet notified.

Section 41(2) – Requires a recipient to reverse the credit along with interest if the supplier has not paid the tax payable against such supply.

Inference of above provisions –

• Recipient must claim credit based on valid tax invoice, reflection in GSTR-2B.
• Recipient is liable to reverse credit if tax declared is unpaid through GSTR 3B by the supplier, i.e., the amount which will get auto-populated in ‘ineligible ITC’
• Variance in GSTR 1 & 3B will lead to restrictions in credit (either by supplier or recipient).
• Excess credit claimed by supplier can affect recipient’s credit
• Supplier has defaulted payment of 1% tax liability in cash based on rule 86B, credit of the recipient will be restricted

The common understanding from the above is that to claim ITC my supplier has to be 100% compliant under GST, and any non-compliance w.r.t filing returns and payment of taxes would affect the recipient’s credit. Ideally, any non-compliance by a taxpayer must first be addressed with such taxpayer only. The recipient must not be asked to bear the burden of his supplier’s non-compliance.

Compare this with the UK VAT practice where if the payment of ones bill is not made by the customer, one can go for a refund of the VAT paid with no direct punitive action on the customer!

Also, if above provisions are introduced, then what is the requirement of Section 16(2)(aa) which has been made effective from 1^st January 2022?

Way forward for Taxpayers

1. Ensure vendor categorization is performed. (Category A – compliant & organized, Category B – compliant but unorganized, Category C – non-compliant & unorganized)
2. Impose strict terms with suppliers on their tax compliance (Category B & C)
3. Implement 75:25 payment structure, where 25% is paid only upon reflection in GSTR 2B and where supplier GSTR 3B matches to his GSTR 1.
4. Verify other supplier compliances – e-invoicing compliance, e-way bill compliance, etc.

Issues which require Clarity:

• Would the transactions included in ineligible ITC in GSTR 2B become eligible ITC automatically once the supplier makes the correct payment of taxes?
• Any credit that is restricted due to aforementioned conditions, is rectified subsequently, would such credit be subjected to time limits mentioned in s16(4)?
• Implementation of rating system to enable recipients to accept/reject vendors during on-boarding process?
• Credit related to previous financial year, GSTR 1 filed by supplier beyond timelines mentioned (Sep/Nov) – suo-moto credit claim by recipient option not enabled. (earlier available under section 38, now omitted).
• Whether credit in relation to domestic reverse charge transactions with registered vendors related must be matched for the purpose of credit claim in GSTR 3B? If liability is paid, can credit be taken in case vendor has not filed his GSTR-1 under RCM as ‘Y’?
• Unjust profiteering by the department still not addressed – approaching both supplier and recipient.
  • Will the department give recipient back the reversed ITC if the supplier pays the tax?
• Cannot avail the ITC without utilisation – in case under protest – IGST ITC balance cannot be maintained due to present GST law on utilisation mechanism of ITC.
• Scenario where supplier has filed returns and paid taxes but after the due date prescribed for availing the credit – Interplay with Sec 16(4) not addressed;
• Whether eligibility of credit also would be automated through the portal, i.e., identification of situation and ineligibility under section 17 and various conditional rate wise notifications?
• Whether the concept of interest on net liability would apply in a situation where tax liability of a period is discharged in another subsequent tax period? This in-turn questions the concept of future credit utilisation against past tax liabilities.
• Whether the implementation of such strict regulations would impact all the taxpayers similarly? Would those entities having mandatory internal audits, large teams for compliances and ability to spend money on outsourcing functions be on the same level as the small and medium enterprises? Considering India’s unique blend of business can the government say they have considered the difficulties of the common man?
  • Equality is a dynamic concept with many aspects and dimensions and it cannot be ‘cribbed, cabined and confined’ within traditional and doctrinaire limits…equality is antithetic to arbitrariness…Where an act is arbitrary it is implicit in it that it is unequal both according to political logic and Constitutional law and is therefore violative of Article 14. – [E P Royappa v State of Tamil Nadu (1974) 4 SCC 3 [85]]
• This provision can be disputed on the grounds that it is – harsh, oppressive, unreasonable, arbitrary- Article 14 & 19(1)(g).

Clarity on Interest on ITC

Section 50(3) has been amended retrospectively from 1^st July 2017 to enable interest to be charged on the input tax credit which was availed and utilised in excess. Earlier, ambiguity remained whether interest would be applicable if ITC was merely availed without utilisation. As specific interest rate has not been provided, the residuary rate of 18% p.a. would apply presently. Although, whether the concept of net liability and the requirement that ITC must be utilised for interest to arise must be tested against the interest liability arising from Rule 37 (180 days non-payment to vendor).

Time limit to claim ITC extended to 30^th November

Section 16(4) is being modified to allow ITC claim from September GSTR 3B due date to 30^th November. Although, practically this translates to claiming the credit in October GSTR 3B which is due on 20^th November, but can be delayed for 10 days additionally.

Recently Karnataka HC stays assessment denying ITC for belated return-filing subject to deposit [TS-73-HC(KAR)-2022-GST], raises an important question – whether credit claimed in books of accounts in sufficient grounds to be eligible for credit, or GSTR 3B filing is mandatory? We would have to wait and see how this pans out.

Conclusion

Considering the stringent measures in place against non-compliance, the ineligibility of ITC to the recipient due to the actions of the supplier imposes a way of tax treatment across the B2B segment and restricts not only the input tax credit but also the business. It is surprising that the GOI has been making wonderful progress in other economic areas. However, the dream which was sold in the inception of GST that there would be seamless flow of ITC and GST will bolster businesses in India seems to be a far-fetched dream. Earlier minimal restrictions created roadblocks in the journey to claim ITC, but the Budget 2022 has strayed from the path itself. These laws would practically function appropriately in a completely matured economy with high level of technological capabilities available to all.

The view expressed in the article are those of the authors only. For any feedback please email  akshay@hiregange.com

This article was originally published in the KSCAA journal March 2022.