The central government vide Notification no 49/2019 central tax dated 9/10/2019 has made amendments to CGST Rules, 2017. One of the amendments is insertion of sub-rule (4) to rule 36 which is reproduced as follows: 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 in GSTR-1 ( and consequently does not appear in GSTR-2A) under sub-section (1) of section 37, shall not exceed 20 per cent 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.’
What is the 20% Input Tax Credit Rule (Sub-rule 4 of Rule 36)
Let us understand the New ITC Rule of 20% capping with illustrations:
Case 1 : If Input tax credit as per buyer records exceeds the limit of 20% of what appears in GSTR 2A
Suppose for the month of October 2019, Mr.A, a registered person, has Rs.1,00,000 as eligible ITC in respect of which respect of invoices/debit notes uploaded by his seller in their GSTR-1 and appear in GSTR-2A of Mr.A; and Rs.50,000 as ITC in respect of which respect of invoices/debit notes has not been uploaded by his seller in their GSTR-1 and does not appear in GSTR-2A of Mr.A.
After the insertion of sub-rule 4 to Rule 36, the eligible credit of Mr.A shall be as follows:
|With respect to eligible ITC invoices/debit notes uploaded by his seller in their GSTR-1||1,00,000|
|With respect to ITC invoices/debit notes not uploaded by his seller in their GSTR-1||1,00,000*20%=Rs. 20,000|
|Total ITC available||Rs. 1,20,000|
Effectively, ITC in excess of 20% i.e. Rs.30,000 (50,000 – 20,000) shall be ineligible for availment for the month of October.
Case 2: If Input tax credit as per buyer records is less than 20% of what appears in GSTR 2A
Suppose for the month of October 2019, Mr.A, a registered person, has Rs.1, 00,000 as eligible ITC in respect of which respect of invoices/debit notes uploaded by his seller in their GSTR-1 and appear in GSTR-2A of Mr.A; and Rs.10, 000 as Input tax credit in respect of invoices/debit notes which has not been uploaded by his seller in their GSTR-1 and does not appear in GSTR- 2A of Mr.A.
With respect to eligible ITC invoices/debit notes uploaded by his seller in their GSTR-1
With respect to ITC invoices/debit notes not uploaded by his seller in their GSTR-1
Total ITC available
Contradiction to New 20% Input Tax Credit Rule
The above sub-rule seeks to restrict the Input tax credit (ITC) in respect of invoices/debit notes not uploaded by seller in GSTR-1 ( and consequently does not appear in GSTR-2A) to the extend of 20% of eligible ITC in respect of invoices/debit notes uploaded by seller in GSTR-1(which is supposed to appear in GSTR-2A).
This amendment seeks to negate down para 4 of press release dated 18-10-2018 which reads as follows: ‘It is clarified that the furnishing of outward details in FORM GSTR-1 by the corresponding supplier(s) and the facility to view the same in FORM GSTR-2A by the recipient is in the nature of taxpayer facilitation and does not impact the ability of the taxpayer to avail Input tax credit on self-assessment basis in consonance with the provisions of section 16 of the Act. The apprehension that ITC can be availed only on the basis of reconciliation between FORM GSTR-2A and FORM GSTR- 3B conducted before the due date for filing of return in FORM GSTR-3B for the month of September, 2018 is unfounded as the same exercise can be done thereafter also.’
How the taxpayer will be impacted by the 20% ITC Rule
After the insertion of this sub-rule, the reconciliation of GSTR-2A and invoices has become mandatory to find out the Input tax credit to be availed for each month. This results in a workload to the tax-payer / practitioners/professionals to reconcile the GSTR-2A each month.Impact of the amendment on reconciliation of GSTR-2AThus, in this case, the entire Input tax credit (ITC) in respect of invoices/debit notes uploaded by seller in GSTR-1 amounting to Rs.10, 000 shall be available as it is less than 20% of eligible ITC (Rs.1, 00,000).
Also, taxpayers have to keep a close follow up with their suppliers which can sometimes result in tough relationship with the vendor.
Another common issue is that the supplier may inadvertently report B2B transactions as B2C as a result of which invoices/debit notes may not appear in GSTR-2A of the recipient. The time lag to amend the same by the supplier may result in a blockage of funds for the recipient.
For those taxable persons who have a single/very few suppliers may not be much affected by this amendment as the reconciliation and follow-up will be easier. But for those taxable persons who are retailers or in the lower levels of the chain especially in the FMCG industry or Multi-product dealers may find it hard to reconcile and follow up with suppliers every month.
Open Issues to be addressed with regards to 20% ITC Rule
- Mismatches between GSTR-1 and GSTR-2A – Since GSTR-2A is auto-populated on the basis of the corresponding FORM GSTR-1 furnished by suppliers even after the due date, in such cases there would be a mismatch between the updated FORM GSTR-2A and the actual invoices for a given period, making it difficult to reconcile both.
- Cases where GSTR-1 is filed quarterly by supplier – In case of taxable persons having Turnover less than Rs.1.5 crores, the GSTR-1 is to be filed quarterly (Notification 46/2019 central tax dated 09/10/2019). However, since input tax credit (ITC) is to be availed each moth in FORM GSTR-3B, it becomes impossible to reconcile monthly invoices with GSTR-2A (as it would be updated only after the said quarter). Govt has to issue some clarification in these cases.
- Calculation problems – The newly inserted sub-rule does not clarify the situations when the supplier reports the invoice/debit note in a subsequent tax period. Whether this amount will form part of eligible ITC for the reported tax period for the calculation of 20% is a question yet to be clarified. Also when the invoices/debit note is reported subsequently, whether the ITC can be taken as credit on FIFO basis or on a pro-rata basis is also to be clarified.
For example, Suppose for the month of October, Mr.A has availed Rs.1,00,000 as eligible ITC and Rs.20,000 in respect of ITC for which supplier has not uploaded invoice/debit notes amounting to say, Rs.50,000 and for the month of November, suppliers have uploaded invoices for Rs.30,000. A question will arise whether this whole Rs.30,000 can be availed in the month of November or only Rs. 18,000 (30,000 x 30000/50,000) can be availed.
Legal Issues to 20% ITC Rule
- Section 164(1) empowers the Government, on the recommendations of the Council, by notification, to make rules for carrying out the provisions of this Act. When the provisions of CGST Act, 2017 viz., section 16 and section 17 does not provide for such embargo and the matching provisions contained in section 41, 42, 43 and 43A has been suspended as Form GSTR-2 is not operational, whether a rule-making power be invoked for such restrictions has to be looked into. Further, it is a well-established ratio that rule cannot override the provisions of the Act.
- On failure of supplier to furnish details in his Form GSTR-1, the recipient is restricted ITC without any failure on his part. It violates the basic principle of law. Law cannot compel a man to do what is impossible. It is against the principle of natural justice and hence unreasonable.
How to address 20% Input Tax Credit Rule?
Taxpayers who do a monthly GST Reconciliation will find it easier to follow the 20% ITC Rule. Many of IRIS GST customers have streamlined vendor communication with the use of IRIS Sapphire and hence, the reconciliation is not a herculean task any more.
IRIS Sapphire is powered by smart auto reconciliation and advanced manual reconciliation. Every time a GSTR 2A is downloaded in IRIS Sapphire, smart recon matches it with the invoice data uploaded and separates the invoices in matched, buyer only and supplier only buckets.
The advanced reconciliation lets you identify gaps in the mismatch where invoices have not matched either due to the availability in different financial years or invoice number format issues.
User can take bulk actions to remove the mismatches leading to ITC maximization
Further, the vendor management module helps easy communication with the vendor from within the software, where you can mark all the mismatched invoices to the vendor for faster resolution.
What more, the reconciliation can be either done PAN wise or GSTIN wise as per the choice of the user.
Speak to our GST expert today in a one-to-one session on 20% ITC Rule, effect of the same on your company and way forward.