October is a month of festivities for India and it was expected that the government would spur the mood of the market by way of some positive announcements. To this extent, the announcements made in the 37
th GST Council meeting on September 20 did help assuage the nerves by way of certain positive announcements towards rationalisation of the tax rates and removal of ambiguities in the law. While the amendments in the rates were notified on September 30, other recommendations were notified on October 9, including amendments to the GST rules.
A crucial change which can be a mood-spoiler for the taxpayers was brought in by inserting a new clause in Rule 36 of the GST Rules, restricting Input Tax Credit (ITC) for invoices / debit notes received by a recipient, but not uploaded by the suppliers in their outward returns, to 20 percent of the eligible ITC in respect of invoices / debit notes uploaded by the suppliers.
Restricting available credits
While at first glance, this seems to be beneficial to the taxpayer, allowing him to avail credits not appearing in his inward returns. However, on a closer scrutiny, it emerges that the amendment results in restricting the available credits to the taxpayer.For better understanding, let us examine as to how this amendment works:
An assessee has paid input tax of Rs 200, of which Rs 150 is reflected in his inward return, but Rs 50 is not reflected therein as the suppliers did not furnish the details of their outward supplies; Post the amendment, the assessee will be entitled to claim total ITC of Rs 180 only, which would consist of Rs 150 appearing in the inward return, and Rs 30 (20 percent of Rs 150) towards Rs 50 which did not reflect in his inward return.
Until this amendment, the assessee could provisionally avail eligible ITC on self-assessment per Section 41 of the CGST Act. While Section 42 of the CGST Act did provide for restricting the ITC on account of a mis-match between outward supplies declared by the suppliers and ITC claimed by the recipient, the mechanism as originally envisaged by the Act, for matching the outward supplies reported by a supplier in GSTR-1 returns with the corresponding inward returns filed by the assessee in Form GSTR- 2 could not be implemented.
Subsequently, the government emphasised the need for the taxpayers to carry out a reconciliation of the credits availed by them with GSTR-2A statement which reflects the details of inward supplies made to the assessee by the suppliers on GSTN Portal. This reconciliation was to be carried out by the assessee after downloading the GSTR-2A from the GSTN Portal and no specific time-frame was prescribed for carrying out the reconciliation. Since the annual returns to be filed by the taxpayers, specifically required them to report such reconciliations, it was presumed to be an annual exercise.
In the meantime, GST authorities were issuing notices to the taxpayers for mismatches in the GSTR-2A statements with the credits availed by them, which are being contested at various forums. Andhra Pradesh High Court has already granted interim stay against a recovery proceeding initiated on a similar issue, on the ground that till such time the mechanism as envisaged in the CGST Act is made effective, a mismatch between GSTR-2A and GSTR-3B cannot be the basis for denying credits to a recipient.
Legality may be challenged
The legality of this amendment is likely to be challenged on multiple grounds. There is a compelling argument that a bona-fide taxpayer cannot be penalised by disallowing his eligible credits on account of non-compliance by the supplier. This issue is already the subject matter of a writ petition, which is under adjudication. Further, the amendment does not distinguish between bona-fide cases where the mismatch is due to supplier’s fault and cases where bogus or fraudulent credits are claimed, thereby making the amendment subject to challenges on the ground of equity.
Also, it is a well-established principle that if the principal statute does not ascribe a restriction, the same cannot be effected by way of a ‘delegated legislation’. In this context, while the amendment seems to be made in terms of the powers conferred under Section 43A (4) of the CGST Act, it is quite fascinating to note that this section has not yet been notified.
While it would be interesting to follow the judicial interpretations with regard to this amendment, it would be preferred if the government addresses the issue through a suitable clarification or amendment to build trust with the taxpayers.
However, till such time, the taxpayers would be required to carry out these reconciliations on a monthly basis, thereby significantly adding to their compliance costs. In case there are mismatches, it would result in reduction of available credits and payment of tax in cash, leading to blockage of working capital.
Manish Mishra is Partner at J Sagar Associates. With inputs from Shikha Parmar, Senior Consultant, J Sagar Associates. The views are personal .