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Relaxation In Input Tax Credit- 10% Rule 36(4)

Rachit Agarwal
Rachit Agarwal

Goods and Services Tax (GST) is considered one of the biggest reforms in India. However, one thing that has become the talking point is – the mechanism of input credit under GST. Input Tax Credit means reducing the taxes paid on inputs, i.e. claiming credit of GST paid on the purchase of goods and services which are used in furtherance of business, from taxes to be paid on output.

GST in its starting days had no restriction on availment of ITC in GSTR-3B irrespective of the fact whether the same has been uploaded by the supplier or not in GSTR -1, thus in most cases not reflecting in GSTR-2A of the recipient. This was also sometimes leading to excess availment of credit by the supplier and not fulfilling the GST’s basic concept of matching as decided during its implementation. To curb this, The CBIC released an important notification No. 49/2019 on 9 October 2019, inserting a new sub-rule (4) under rule 36 of the CGST Rules, 2017. The said Rule 36(4) is reproduced below:

“(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.”

This limit was further reduced to 10% by Notification No 75/2019 issued on 26th December 2019.

In simple terms, the rule states that the provisional tax credit (without invoices on GSTR-2A) can be claimed in the GSTR-3B only to the extent of 10%* of eligible ITC reflected in the GSTR-2A. Hence, the total ITC that can be claimed in GSTR-3B is 110% of the eligible ITC appearing in the GSTR-2A of a particular period. For example, say in any month, the input tax credit available (as per books) is Rs 1,500. Out of this, certain vendors wherein input tax credit involved is say Rs 500 have not filed their GSTR-1. Now, due to amendment, the buyer can avail ITC only to the extent of Rs 1,100 (i.e. 110% of R 1,000) and not 1,500.

Some clarifications have also been made by the Sl. No. 1 of the Circular No. 123/42/2019-GST, dated 11-11-2019, which states that IGST paid on import, documents issued under RCM, credit received from ISD, etc., are outside the ambit of sub-section (1) of Section 37, hence the provisions of Section 36(4) shall not apply to such cases.  As GSTR-2A is a dynamic form that is updated based on details uploaded by suppliers, the cut-off date for claiming provisional credit will be the due date of filing returns only. Hence, a taxpayer may claim up to 10% of ITC based on invoices uploaded by his suppliers as on the date of filing his GSTR-1.

As the implementation of this new rule could impact a company’s working capital, businesses will need to invest additional time in managing their accounts payables more effectively. The move appears to be aimed at enforcing a better discipline around tax payment, reporting, and credit system.

In the current scenario, as the whole nation is under lockdown due to COVID-19, this rule has been relaxed for some time by Notification No 30/2020-CT dated April 03, 2020 wherein it has been provided that said condition shall apply cumulatively for the period February, March, April, May, June, July and August 2020. Therefore, you are required to take effect of all adjustments for the period of February 2020 to August 2020 while filing the return for the tax period September 2020. This short-term relaxation is a very welcomed move for the traders and the whole industry. So, this rule should be strictly followed by the businesses to avoid any incompliance in GST.

For any professional help, kindly visit the consultancy division of ProCapitas (link is given below) or mail us at [email protected]

https://procapitas.com/consultancy-services/

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