Update on 22nd December 2020
1. Following changes in Rule 36(4) to be made effective from 1st January 2021:
The recipients can claim provisional ITC in GSTR-3B to the extent of 5% instead of earlier 10% of the total ITC available. ITC shall be available as per the invoices uploaded by respective suppliers either in their GSTR-1 or by using the Invoice Furnishing Facility (IFF).
2. Under new Rule 86B, restriction has been imposed 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
Provisional input tax credit (ITC) refers to the Input Tax Credit which can be claimed even if ITC is not available in GSTR-2A.
Input Tax Credit (ITC) means reducing the taxes paid on inputs from taxes to be paid on output. Under the IGST Act, input tax is defined as IGST, CGST or SGST charged on any supply of goods and/or services. And this tax paid on purchases by you can be used as a tax credit against your tax liability.
One of the basic rules for claiming ITC is that the invoice or document should be reflected in the recipient’s GSTR2A, then ITC eligibility conditions can be checked and ITC can be claimed.
In the initial months of GST implementation, the focus of the Government was to stabilise the system and also increase compliance and adoption by taxpayers. Hence, taxpayers were allowed to claim ITC in self-computed GSTR 3B, as per their internal records, whether or not the invoices were reported by the supplier and tax liability was fully cleared by the supplier. While this move eased the compliance obligations for taxpayers, there was surge in fraudulent/erroneous ITC claims as neither the taxpayers paid much attention to supplier data reconciliation nor were the returns closely monitored.
For the purpose of monthly return GSTR-3B, taxpayers continued to follow ITC computation based on their internal records and periodic matching with the data uploaded by suppliers. It was the annual return GSTR-9, which necessitated the need to do reconciliation of internal records and purchase invoices in GSTR-2A. In GSTR-9, taxpayers had to report and explain the differences in ITC claimed. Thus, GST Reconciliation for the annual period i.e. FY and the September following the FY, became an important activity.
In order to keep a check on fraudulent cases, Government amended the ITC rules to put a cap on the limit of provisional ITC that can be claimed. The limit was set at 20% of invoices reported in taxpayers’ GSTR 2A in Oct 2019 and further reduced to 10% in Jan 2020.
So, let us understand Provisional ITC and respective amendments to Rule 36 of ITC Claim in detail.
1. What is Provisional ITC?
Provisional input tax credit (ITC) refers to Input Tax Credit which can be claimed even if ITC is not available in GSTR-2A.
For availing Input tax credit, the invoices need to be uploaded by suppliers in their GSTR 1. If not uploaded, ITC with respect to such missing invoices will be restricted to 10% of ITC (20% – if before Jan 2020) eligible from invoices which are uploaded by suppliers and hence are part of GSTR 2A. The concept of provisional ITC was brought into effect vide CGST notification no. 49/2019 central tax dated 09/10/2019.
1.1 20% ITC Rule | Notif No.: 49/2019 Central Tax | Rule 36 (4) | 20% Provisional ITC
The central government via Notification no 49/2019 central tax dated 9/10/2019 made amendments to CGST Rules, 2017. One of the amendments was 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.
1.2 Amendment to Rule 36(4) | 10% ITC Rule
In the 38th GST Council meeting, it was decided that taxpayers to avail provisional ITC on invoices not reflecting on GSTR-2A only to the extent of 10% of ITC reflecting on GSTR-2A and no longer 20%. The new percentage of 10% is applicable from 1st Jan 2020 onwards vide notification no 75/2019 central tax dated 26/12/2019.
Understanding the 10% Provisional Input Tax Credit Rule (Rule 36 (4))
Let us understand the ITC Rule of 10% capping with illustrations:
Case 1 : If Input tax credit as per buyer records exceeds the limit of 10% of what appears in GSTR 2A
Suppose for the month of Jan 2020, Mr.A, a registered person, has Rs.1,00,000 as eligible ITC in 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 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||1,00,000*10%=Rs.|
|Uploaded by his seller in their GSTR-1||10,000|
|Total ITC available||Rs. 1,10,000|
Effectively, ITC in excess of 10% i.e. Rs.40,000 (50,000 – 10,000) shall be ineligible for availment for the month of Jan 2020.
Case 2: If Input tax credit as per buyer records is less than 10% of what appears in GSTR 2A
Suppose for the month of Jan 2020, Mr A, a registered person, has Rs.1,00,000 as eligible ITC in respect of invoices/debit notes uploaded by his seller in their GSTR-1 and appear in GSTR-2A of Mr A; and Rs.5,000 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||1,00,000|
|With respect to ITC invoices/debit notes not uploaded by his seller in their GSTR-1||5,000|
|Total ITC available||Rs. 1,05,000|
Thus, in this case, the entire ITC in respect of invoices/debit notes not uploaded by seller in GSTR-1 amounting to Rs.5,000 shall be available as it is less than 10% of eligible ITC (1,00,000*10%=Rs. 10,000).
1.3 Circular 123/2019 GST – Clarification to Notification 49/2019
Just before due date of GST-3B for the month of November 2019, CBIC had resolved queries on provisional credit @ 20% (now 10%) through GST Circular 123/42/2019 Dt. 11-11-2019.
Following is the list of clarifications issued with regard to the restrictions in availing input tax credit in terms of sub-rule (4) of rule 36:
- Restriction is not imposed through the common portal hence the taxpayer can avail credit on self-assessment basis in accordance with sub-rule (4) of rule 36.
- Taxpayers can avail full ITC in respect of following
- IGST paid on import,
- documents issued under RCM,
- Credit received from ISD etc.
i.e. which are outside the ambit of sub-section (1) of section 37
- Restriction of 36(4) will be applicable only on the invoices / debit notes on which credit is availed after 09.10.2019.
- Credit available under sub-rule (4) of rule 36 is linked to total eligible credit from all suppliers against all supplies whose details have been uploaded by the suppliers. Hence restriction imposed is not supplier wise.
- The cut-off date to compute the eligible ITC is due date of filing GSTR-1
- Provisional ITC for a particular month should not exceed 20% (now 10%) of eligible ITC, but can be lesser than that. Thus, if the provisional ITC that recipient wants to claim in Rs 10000 and the Provisional ITC calculated as per Rule 36(4) comes to Rs 50000, then only Rs. 10000 should be claimed.
- The balance ITC may be claimed by the taxpayer in any of the succeeding months provided details of requisite invoices are uploaded by the suppliers. He can claim proportionate ITC as and when details of some invoices are uploaded by the suppliers provided that credit on invoices, the details of which are not uploaded (under sub-section (1) of section 37) remains under 20 per cent of the eligible input tax credit, the details of which are uploaded by the suppliers.
1.4 Latest Update on Provisional ITC Rule
3rd April 2020: Notification No: 30/2020-Central Tax, dt. 03-04-2020
CBIC under COVID 19 relief measures has relaxed the provisions of Rule 36(4), which means ITC in GSTR3B for Feb till Aug 2020 can be claimed as per Books/ Purchase register without considering the ITC as per GSTR 2A. However, the ITC already claimed has to be matched in a consolidated manner with GSTR 2A before filing GSTR 3B in September 2020.
Hence, there would be no loss of credit to the buyers if suppliers fail to file the returns on time till 30th August 2020.
9th October 2020: Circular 142/12/2020 GST
CBIC has clarified that taxpayers shall reconcile that cumulative ITC availed in GSTR 3B for the period Feb 20 to Aug 20 shall not exceed 110% of ITC available in GSTR 2A till due date of GSTR 1 for the month of September. And any credit claimed in excess of 110% of credit available shall be reversed in Table 4(B) GSTR 3B of September 2020
Any excess credit if not reversed will be treated as ineligible credit availed.
2. Open Issues with regards to 10% 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 – In cases where the actual credit itself is deferred to next month then how will the provisional ITC be calculated. It will have to be ideally looked as a cumulative amount for all months rather than monthly amounts. For example, Actual ITC claim as per 2A in Jan 2020 is Rs 1,00,000 but say for example Rs 20,000 the taxpayer defers his credit for Feb 2020 and in Jan he has claimed on Rs.80000. Now say for example no invoice comes in 2A in Feb 2020, but still the recipient can claim the Rs. 20,000 and this should not form part of Provisional credit as the invoices are already received but in previous month and hence this is deferred credit.
On failure of supplier to furnish details in his Form GSTR-1, the recipient is restricted ITC without any failure on his part.
3. How the taxpayer is impacted by the 10% ITC Rule
After the insertion of this Rule 36 (4), 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.
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.
4. What does taxpayer need to do?
As a taxpayer you need to do:
- Monthly GST Reconciliation to ensure that all your purchase invoices are uploaded correctly and completely by the suppliers.
- Regular communication with suppliers to get the differences resolved.
- Tracking of ITC claimed provisionally and claimed in 3B on monthly basis.
A Daunting Task?
Not if you are using IRIS GST for compliance.
Taxpayers in the habit of a monthly GST Reconciliation will find it easier to follow the 10% 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. With IRIS Sapphire you can,
- Identify the invoice mismatches and missing invoices if any, and communicate it to the supplier
- Vendor level view enables you to identify the vendors with whom follow ups are needed
- Detailed invoice view shows you the invoices which need to be corrected
- Additionally, you get insights and reports based on your purchase data, ITC, and supplier uploaded data i.e. GSTR 2A
In light of the notification, the platform is equipped to provide you with
- Analysis of your reconciliation results along with ITC eligibility considering invoices in 2A.
- Watchlist to help you stay notified about filing and non-filing by supplier.
IRIS GST is official GST Suvidha Provider (GSP) in India, offering premium GST compliance tools like GST Returns (IRIS Sapphire)and Eway Bill generation (IRIS Topaz). With features such as Advance Reconciliation, Smart Reports, Fuzzy Logic, Vendor Management, Smart Dashboard, User Roles, etc. IRIS GST ensures you a hassle-free GST compliance.