As the remarkable year 2020 ends, we see another set of amendments in GST Act and Rules. Given the numerous cases of fraudulent practices emerging, bringing in stringent rules is given. While amendments are more in the direction of keeping a check on malpractices, the genuine taxpayers will have more process to follow and need to be extra vigilant regarding their counterparts.
With the backdrop of 12000 ITC fraud cases, cancellation of 1.63 Lakh GST Registrations and 365 arrests due to non-compliances, Government has issued GST notification 92/2020, GST notification 93/2020 and GST Notification 94/2020 dated 22nd Dec 2020 to curb tax evasion. These notifications introduce radical change and stringent controls in the process of GST cancellation, ITC claim, EWB validity and GSTR 1 filing, to curtail practice of issuing fake invoices or excessive ITC Claims.
Here is a gist of the recent GST amendments and notifications:
1. Limit on ITC Claim and Utilisation
The recently notified changes set an upper limit to ITC that can be claimed or utilised or in other words, necessitates clearing of tax liability in cash.
- Upper limit for provisional ITC pegged at 5%
With effect from 1st January, 2021 the limit of claiming provisional ITC in respect of invoices not furnished by the corresponding suppliers ( Rule 36(4)) will be limited to 5% of credit available. This limit of Provisional ITC was earlier 10%.
- Restriction on full utilization of Input Tax Credit – Newly inserted Rule 86B
In addition to keeping the limit of 5% for provisional ITC, there is also a cap on utilization of ITC. Subject to the conditions specified, tax liability cannot be fully settled using only ITC. The newly inserted Rule 86B shall be affected from 1st January 2021 wherein restriction has been placed on setting off more than 99% of tax liability from ITC where the value of taxable supplies other than exempt supply and zero-rated supply exceeds Rs. 50 lakhs in a month.
Using ITC upto 99% or in other words, paying at least 1% of tax liability in cash has many other aspects to be noted. The applicability of rule 86B is to be computed on a monthly basis and subject to the following exceptions .
- Where the taxpayer has paid Income Tax exceeding Rs. 1 lakh in two preceding financial year.
- Where taxpayer has received refund exceeding Rs. 1 lakhs u/s 54 of CGST Act 2017.
- Where taxpayer has used electronic cash ledger to pay of liability on outward supplies which cumulatively makes 1% of the total liability up to the said month
- Where a person is a Government Department, Public Sector Undertaking (PSU), local authority or a statutory body.
While these measures to restrict the utilisation of ITC are to ensure the fake invoicing business gets curtailed, the small and genuine taxpayers are also going to get impacted. Though 1% seems a small percentage, however in the times when businesses are recovering from the economic slowdown due to pandemic and liquidity is a concern, these measures hurt the genuine taxpayers. So does the reduction of provisional ITC from 10% to 5%.
These changes also require taxpayers to do additional activities on a monthly basis such as compute if 86B provision is to be followed, keep tab on the compliances of vendors, track of provisional ITC claimed, reconcile such invoices in the subsequent month and so on
2. Blocking of GSTR 1 if GSTR 3B is not filed
The ITC available to the recipient is determined based on the GSTR 1 invoices of suppliers that are auto-populated in GSTR 2A and from there in GSTR 2B. The tax liability is settled, either in cash or via ITC, while filing GSTR 3B.
WIth the insertion of sub rule (5) in rule 59, filing of GSTR 1 itself will be blocked if GSTR 3B is not filed for the previous 2 consecutive months. Earlier this year, the move to block E-way Bill generation on non-compliance of GSTR 3B was implemented and now it is extended to GSTR 1 filing.
- Taxpayers to whom the new rule 86B applies. I.e. taxpayers who need to pay at least 1% of tax in cash, GSTR 1 for them will be blocked if GSTR 3B is not filed for the previous return period.
- QRMP scheme which is effective from Jan 2021, if opted, GSTR 3B will be filed quarterly. In case of quarterly return filers, the taxpayer who missed to file GSTR 3B for the preceding quarter shall not be permitted to file GSTR 1 or Invoice Furnishing Facility (IFF) of the subsequent quarter.
Non-compliance by vendors directly impacts the ITC claim of the recipient, also now the limit of claiming provisional ITC is restricted to 5% instead of earlier 10%. Moreover, GST Officer is additionally empowered to suspend the GST registration in case of excessive ITC Claims.
Hence, greater need to keep track of GST compliance of vendors. While status of returns filed is available in auto-drafted GSTR 2A, apps such as IRIS Peridot make it easier and handy to know the overall pattern of filing. The latest version of Peridot also enables getting a PAN level compliance view of vendors and knowing if vendors have been filing on time.
3. Suspension of Registration
It is evident that the Government is closely monitoring the compliances of taxpayers and as result many GST Registrations have been cancelled or suspended recently.
And in continuation to the same, few changes have been made to the Rule 21 of CGST Act 2017.
Words “a reasonable opportunity of being heard” have been removed from clause (2) of Rule 21A d (Rule 21 lays down rules for Cancellation of GST Registration). Removal of these words is a cause of concern. Furthermore, new clauses to Rule 21 have been inserted
- Clause (e) – where a taxpayer avails Input Tax Credit (ITC) exceeding than that permissible in Section 16. (Section 16 is eligibility and conditions for claiming ITC)
- Clause (f) -where the liability declared in GSTR 3B is less than that declared in GSTR 1 in a particular month.
Due to these clauses, Tax officers have discretionary powers at their hands to decide that the registration of a person is liable to be cancelled under section 29 or rule 21.
Where there are significant deviation/anomalies between details of outward supply as per GSTR 3B and GSTR1 or inward supplies (ITC) as per GSTR 3B and GSTR 2B which indicate contravention of Act, department shall issue Show Cause Notice (SCN) to taxpayer in a newly introduced FORM REG-31. Taxpayer shall be required to submit his response within 30 days of service of notice.
The moment the suspension order is received, the core business activities and GST compliance will get hampered until the suspension proceedings are closed. There could be genuine cases for mismatch of GSTR 1 and GSTR 3B and rationale for claiming ITC. Further there could be clerical errors.
Suspending without the opportunity to be heard, receiving the SCN on emails and response expected soon so as to avoid cancellation could burden the taxpayers.
The taxpayers will now need to have more strict policies and process internally so as to minimise the chance of anomalies and hence unwarranted suspension. Reconciliation of purchase invoices with 2A, comparing with 2B and computing 3B based on GSTR 1, following up with vendors to get discrepancies resolved etc. are some of the tasks which are necessities and not ‘good-to-have’ options. With high volumes of invoices and so many activities to be done on a month-on-month basis, use of technology based solutions is inevitable.
4. More verifications to New registration
Business will need to wait for a longer period and undergo additional verification steps to obtain new GST registration. From erstwhile 3 days, the time limit for system-based registration will now be 7 days.
Where registration is Aadhaar-based under rule 8, biometric authentication will be necessary unless the applicant is exempted under Section 25(6D). Followed by verification of KYC documents before granting the registration.
Tax officers, as they deem fit, may carry out physical verification and in such cases the time limit is increased to 30 days from 7 days.
Thorough verification of entities before granting registration is necessary to keep fraudsters away. However increasing the time limits and discretion for physical verification create friction in ease of doing business.
5. Reduced Validity Period for E-way Bill
Only one day validity is granted to cover a distance of up to 200 kms instead of earlier 100 km. This will require more monitoring of EWB. So, revised validity period is listed below:
|Up to 200 km.
|One day in cases other than Over Dimensional Cargo or multimodal shipment in which at least one leg involves transport by ship.
|For every 200 km. or part thereof thereafter
|One additional day in cases other than Over Dimensional Cargo or multimodal shipment in which at least one leg involves transport by ship.
6. Late Fee Waiver for GSTR 4
Vide notification 93/2020, The late fee waived for delay in filing of GSTR-4 from 1st Nov 20 to 31st Dec 20 for FY 2019-20 for those having principal place of business in Ladakh.
7. CGST Act Provisions come into effect
Changes as per Notification 92/2020 – Central Tax
Central Government hereby appoints 1 January 2021 as the date on which provisions of Section 119, 120, 121, 122, 123, 124, 126, 127 and 131 of the Finance Act 2020 thereby amending the provisions of CGST Act shall come into effect.
Key points are summarised below:
- Voluntary registrations u/s 25(3) of the CGST Act can be cancelled u/s 29(1)(c): Section 25(3) – A person, though not liable to be registered u/s 22 or 24 may get himself registered voluntarily, and all provisions of this Act, as are applicable to a registered person, shall apply to such person.
- Delinked availment of ITC on debit notes with the date of issuance of the original invoice. Thus, ITC can be availed on debit notes issued after 6 months from the end of the financial year to which invoice pertains.
- The powers to condone the delay u/s 30 in applying for revocation of cancellation of registration by the proper officer has been granted to urisdictional Assistant / Joint Commissioner and to Commissioner for further extending such period.
- The requirement to issue TDS certificate u/s 51 has been discarded with new rules and accordingly, the provision for fees (penalty) for the delay in issuance of such certificate has been omitted.
- Any person who retains benefit or at whose instance a supply has been made without issuance of an invoice, or invoice has been issued without supply, or excess ITC has been availed/distributed shall be held liable to the same degree of offence as actual supplier/recipient as per newly inserted sub section (1A) to section 122.
- Availing ITC on fake invoices or fraudulent availment of ITC without any invoice have been made cognizable and non-bailable u/s 132 for anyone who commits or causes committing of such offence or retains benefits arising therefrom.
These announcements which will be in effect from Jan 2021 need to be analyzed by businesses to determine the changes that they need in their current processes and systems so that they are not caught in these stringent checks, which primarily have been defined to keep frauds in check. In addition to these, the parallel compliances such as e-invoicing and blocking of e-way bill system for IRN generated invoices, are other things to be ready with for the new year 2021.
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A brief synopsis of the new notifications
|GST Notification 94/2020
Limit for claiming provisional ITC is pegged to 5%, hence it is important that suppliers file their GSTR 1 on time
Not just EWB but also GSTR 1 of supplier will get blocked, if he fails to file GSTR 3B for two or more tax periods which may impact recipient’s working capital
Rules have also narrowed the validity of the E-Way Bill, Only one day validity is granted to cover a distance up to 200 kms instead of earlier 100 km
|GST Notification 93/2020
|The late fee waived for delay in filing of GSTR-4 from 1st Nov 20 to 31st Dec 20 for FY 2019-20 for those having principal place of business is in Ladakh.
|GST Notification 92/2020
|Central Government hereby appoints 1 January 2021 as the date on which provisions of Section 119, 120, 121, 122, 123, 124, 126, 127 and 131 of the Finance Act 2020 thereby amending the provisions of CGST Act shall come into effect.