Introduction
A Central Tax notification 40/2021 was released on 29th December 2021. According to this notification, a taxpayer can claim an Input Tax Credit (ITC) only if the same appears in their GSTR-2B. Hence, no provisional ITC could be claimed from 1st January 2022 onwards.
Provisional ITC refers to the input tax credit claimed by buyers in their GST returns for invoices that have not yet been reported by their vendors or suppliers to the government. Starting January 1, 2022, provisional ITC claims have been eliminated under the revised Rule 36(4) due to the addition of clause (aa) in Section 16(2) of the CGST Act. Previously, according to sub-rule (4) added to Rule 36 of the Central Goods and Services Tax Rules, taxpayers filing GSTR-3B could only claim an input tax credit up to the amount of eligible credit available in GSTR-2B.
Repercussions of the Amendment
Before the amendment, the balance ITC that was claimed as provisional ITC could be claimed in subsequent months once the suppliers uploaded the necessary details. Until December 31, 2021, if a supplier uploaded some of the pending invoices later, the taxpayer could claim ITC up to 5% of these pending invoices.
However, starting January 1, 2022, taxpayers can only claim ITC if it appears in GSTR-2B, with no provision for the 5% provisional ITC. Now, they can claim the balance ITC that does not appear in GSTR-2B of one period only in later tax periods, provided the supplier reports it in their GSTR-1 and it subsequently appears in GSTR-2B of those later periods.
Since this rule could affect a company’s working capital, businesses will need to spend more time managing their accounts payable more effectively. They might include additional clauses in business contracts to safeguard their interests, such as withholding vendor payments equivalent to the GST amount if there are delays in invoice uploads. It is crucial for businesses to regularly, or even weekly, reconcile their purchase data between their books and GSTR-2A/2B, identify any discrepancies, and communicate these to their suppliers to ensure they upload the missing invoices. Instead of waiting until the GSTR-3B due date, businesses should follow up more frequently with vendors to ensure timely claims.
Constitutionality of the Amendment
The constitutionality of the amendment can be analyzed on the following grounds:
- The restrictions imposed by the amendment are not reasonable
It is unrealistic for the recipient to guarantee that their supplier files GST returns on time and accurately. Additionally, the reconciliation process, involving both monthly and year-to-date reconciliations, increases compliance costs for the recipient. Consequently, Rule 36(4) unfairly penalizes genuine recipients without any fault on their part and provides no recourse for defaults made by their suppliers.
Additionally, Rule 36(4) aims to artificially boost tax collection figures by restricting the availability of credit that would otherwise be legally available to recipients, merely because a few instances of fraud or wrongful credit claims have been detected. Moreover, Rule 36(4) does not effectively prevent the intended misuse, such as fraud or wrongful credit claims, since the restriction must be followed by taxpayers on a self-assessment basis rather than being automatically enforced through the portal.
- The amendment violated the Right to Equality
Rule 36(4) fails to differentiate between genuine cases, where mismatches occur due to the supplier’s actions or omissions, and fraudulent cases, where bogus credits are claimed through collusion between the supplier and recipient. By imposing blanket restrictions on all taxpayers without proving intent (mens rea) and treating all recipients the same, it unjustly penalizes both innocent and guilty parties alike. This approach violates Article 14 of the Constitution, which guarantees equality before the law. Data analytics could instead be used to accurately identify fraudulent taxpayers.
- Lack of proper machinery
The implementation of Rule 36(4) faces several challenges: placing the entire burden on taxpayers, failing to provide time-stamped GSTR-2A data, lacking a system to track entries updated in GSTR-2A from previous months, and not ensuring monthly updates for purchases from quarterly filers. These issues create significant obstacles in effectively enforcing Rule 36(4).
- Negatively affects Ease of doing business
Blocking ITC would increase the cost of doing business and ultimately result in higher prices for consumers due to the cascading effect of taxes. Additionally, it would negatively impact small vendors in the supply chain, as it would discourage procurement from small taxpayers who file GSTR-1 quarterly. This delay means that their invoices would only appear in the recipient’s GSTR-2A at the end of the quarter, causing a working capital blockage for up to three months. The issue would be exacerbated if the supplier fails to upload the invoice or uploads incorrect details, as amendments can only be made in the next GSTR-1. Therefore, Rule 36(4) not only impacts the recipients who face the restrictions but also affects their suppliers and consumers at large.
Conclusion
While Rule 36(4) aims to prevent fraudulent ITC claims, it also places unreasonable restrictions on genuine and compliant taxpayers. This can be challenged in court as a violation of Articles 19 and 14 of the Indian Constitution. The rule is likely to cause more issues for legitimate taxpayers, who will face numerous mismatch notices, illustrating a misguided approach that penalizes many to catch a few fraudulent taxpayers.
FAQs
What is the provisional claim of ITC?
The provisional claim of Input Tax Credit (ITC) in India’s Goods and Services Tax (GST) system is a mechanism that allows taxpayers to claim credit for taxes paid on inputs before filing their final returns. This system, based on self-assessment, enables businesses to claim ITC on a monthly basis in their GSTR-3B filings. To prevent misuse, the claim is limited to 105% of the eligible ITC as per the auto-populated GSTR-2B. This provisional claim helps businesses maintain cash flow and reduces working capital burden. However, it’s subject to reconciliation and adjustment in annual returns, and must be reversed if not validated in final returns.
Can ITC be claimed if not reflected in 2A?
Input Tax Credit (ITC) can be claimed even if not reflected in Form GSTR-2A, but with caution. The taxpayer must possess a valid invoice or debit note and should have received the goods or services. However, claiming ITC not in GSTR-2A increases the risk of scrutiny. The government has introduced Rule 36(4), limiting ITC claims on missing invoices to 5% of the eligible credit appearing in GSTR-2A. Taxpayers should reconcile their purchases with GSTR-2A regularly and follow up with suppliers to ensure timely invoice uploading. It’s crucial to maintain proper documentation to support any ITC claims not reflected in GSTR-2A.
What are the new rules for ITC claims?
Input Tax Credit (ITC) rules typically aim to prevent fraud and ensure proper tax compliance. Recent changes include stricter documentation requirements, time limits for claiming credits, and enhanced verification processes. Some jurisdictions have implemented real-time invoice matching systems. Businesses might face restrictions on ITC claims for certain expenses or industries. The focus is often on improving transparency and reducing tax evasion.
Can ITC be claimed after 2 years?
Generally, ITC claims after 2 years are restricted in most jurisdictions. Many tax authorities impose time limits to ensure timely reconciliation and prevent abuse. However, exceptions may exist for certain circumstances, such as retrospective tax assessments or court orders. Some countries allow partial claims with penalties, while others completely bar claims beyond the stipulated period. Businesses should prioritize timely filing to avoid loss of eligible credits. It’s crucial to consult current local tax regulations or a tax professional for specific rules, as policies can change and vary by region. Proper record-keeping is essential to support any belated claims if permitted.
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