Analysis of clarification on restriction on Input Tax Credit under GST

Introduction

In line with the GST Council’s decision of the 37th Council meeting on capping input tax credit, sub-rule (4) to Rule 36 of the CGST Rules, 2017 has been inserted vide Notification 49/2019 dated 9th October 2019, which makes it mandatory to review inputs as appearing in GSTR-2A of the taxpayer.

It mandates that the taxpayer shall not avail input in excess of 20% of the eligible credit available in GSTR-2A over and above the eligible credit.

For achieving this, the taxpayer needs to conduct a monthly reconciliation of input with GSTR-2A and then avail the input accordingly (maximum capped to 120% of eligible credit available subject to actual input available) in GSTR-3B.

Initial Ambiguities

After notification of this rule, there were ambiguities regarding its application and many questions unanswered, such as:

• GSTR-2A being a dynamic form, the inputs shall be compared as on which date?

• How to claim ITC for the inputs which have been received from taxpayers filing quarterly returns?

• Whether to take into consideration the inputs as available from reverse charge, ISD credit etc.?

• Whether the credit would be blocked by the portal itself or will be ascertained by the taxpayer on a self-assessment basis?

CBIC Clarifications – Circular No. 123/42/2019-GST (11th November 2019)

In order to bring all ambiguities to rest, the Central Board of Indirect Taxes and Customs (CBIC) issued a circular on 11th November 2019, clarifying various issues and their solutions.

Key Points from the Circular:

1. Restriction on input shall not be imposed through the common portal and will be the responsibility of the taxpayer to claim restricted input on a self-assessment basis.

2. The restriction on availment of input is imposed only upon such invoices/debit notes which are required to be uploaded by the suppliers in their GSTR-1.

3. Full ITC in respect of IGST paid on imports, documents issued under RCM, and credit received from ISD may be obtained without any restrictions.

4. The restriction shall be applicable only on invoices/debit notes on which credit is availed after 9th October 2019.

5. The restriction imposed shall not be calculated supplier-wise but on total eligible credit from all suppliers against all supplies.

6. The calculation would be based only on such invoices/debit notes which are eligible for ITC.

   • For instance, if any input is not eligible or is ineligible u/s 17(5) of the CGST Act, 2017, then such ineligible input shall not be considered for calculating 20% of eligible credit.

7. The ITC eligibility shall be calculated based on the entries in GSTR-2A as on the due date of filing of GSTR-1 by the supplier.

   • This implies ITC from only those suppliers who have filed their GSTR-1 within the 11th of the succeeding month (for monthly taxpayers) shall be taken into consideration for calculation of 20% restriction.

Special Case – Quarterly Return Filing Suppliers

Regarding taxpayers who file their return on a quarterly basis, there are two possible approaches a taxpayer may adopt:

1. Conservative Approach – Avail ITC quarterly after the supplier has filed their GSTR-1.

   • This will lead to deferment of ITC and may also cause additional cash outflow.

2. Liberal Approach – Avail ITC in the same tax period as envisaged under Section 16 of the CGST Act, 2017.

   • The rationale behind taking such input is that the law restricts availment of input only when the supplier has not uploaded their GSTR-1 within due dates.

   • A quarterly taxpayer is not required to file its GSTR-1 within the tax period; therefore, the question of restriction does not arise.

   • However, this approach is precarious and may lead to future litigations.

Illustration Provided by CBIC

For the sake of uniformity, the same illustration provided in the circular is reproduced below:

Example:
A taxpayer “R” receives 100 invoices (for inward supply of goods or services) involving ITC of Rs. 10 lakhs from various suppliers during the month of Oct 2019 and has to claim ITC in his FORM GSTR-3B of October, to be filed by 20th Nov 2019.

Important Notes

• The balance proportionate ITC may be availed by the taxpayer in any of the succeeding months when the requisite invoices are uploaded by the supplier in their GSTR-1.

• The proportion of ITC claimed shall be such that the total ITC claimed for the tax period shall not exceed 120% of eligible ITC uploaded by the suppliers.

In other words, the taxpayer may avail full ITC in respect of a tax period, as and when the invoices are uploaded by the suppliers to the extent Eligible ITC ÷ 1.2 or Eligible ITC / 120%.

In the instant case:
The ITC of Rs. 10 lakhs may be claimed by Mr. R as and when his suppliers furnish their GSTR-1 to the tune of Rs. 8.3 lakhs [Rs. 10 lakh ÷ 1.2] tax amount in aggregate.

Month-Wise Illustration