20% Input Tax Credit Restriction under GST – An Analysis

20% ITC Restriction

GST Input tax credit without invoice has been capped at 20% to plug revenue leakage.

The new rules, called the Central Goods and Services Tax (Sixth Amendment)Rules, 2019, came into effect on October 9 amid dwindling GST collections.

Keen to plug revenue leakages, the government has decided to restrict input tax credit under the goods and services tax to 20% of the eligible amount for an entity if its supplier has not uploaded relevant invoices detailing the payments made.

There was no such restriction earlier– input tax credit was claimed by taxpayers on the basis of self-assessment. The provisions of the rule says “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 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 [in Form GSTR-1],”

Impact of the above provisions:-

(i) The conditions and eligibility for the ITC that may be availed by the recipient shall continue to be governed as per the provisions of Chapter V of the CGST Act and the rules made thereunder.

(ii) This being a new provision, the restriction is not imposed through the common portal and it is the responsibility of the taxpayer that credit is availed in terms of the said rule and therefore, the availment of restricted credit in terms of sub-rule (4) of rule 36 of CGST Rules shall be done on self-assessment basis by the tax payers.

(iii) After the implementation of this rule, the provisional ITC amount will be restricted only to the extent of 20% of the eligible ITC value already reflected in the GSTR-2A for that period.

(iv) Apart from the 20% of eligible ITC which a taxpayer can claim as provisional credit, the balance tax liability will need to be paid in cash.

(v) This new rule could affect the working capital of a taxpayer, as he will be required to make GST payments in cash, despite having paid his supplier for the tax invoice raised to him and having eligible ITC in his books.

(vi) The balance ITC that has not been claimed as provisional ITC may be claimed in the succeeding months once details have been actually upload by the supplier.

(vii) Ifa supplier has only uploaded part of the pending invoices in a later period, the taxpayer will be able to claim ITC only proportional up to 20% of these pending invoices uploaded.

(viii) The restriction on 20% provisional credit will not be supplier-wise. It will be linked to the total eligible ITC from all suppliers based on details uploaded in the GSTR-2A.

(ix) The restriction on provisional credit will apply to those invoices/debit notes which were supposed to be uploaded by the suppliers and have not been uploaded. This means that a taxpayer can avail full ITC in terms of IGST paid on imports, credit that has been received from an Input Service Distributor (ISD), credit from documents received under reverse-charge mechanism and any other such credit.

(x) As GSTR-2A is a dynamic form which updates based on details uploaded by suppliers, the cut-off date for claiming provisional credit will be the due date of filing returns only. Hence, a taxpayer may claim up to 20% of ITC based on invoices uploaded by his suppliers as on the date of filing his GSTR-1.

(xi) If part of the pending invoices of a supplier are uploaded in a later month, the taxpayer must make sure that provisional credit does not exceed 20% of eligible ITC.

(xii) The provisional ITC availed in a tax period shall be limited to ensure that the total ITC availed does not exceed the total eligible ITC. This means that the LOWER of provisional ITC or difference in eligible ITC (between books and GSTR-2A) will be considered.

Steps to be followed for calculations:-

Considering all the points discussed above, the following are the steps which a business can take to ensure reasonable compliance with the said rule:

a. From the input tax credit taken as per books remove the ineligible credits (i.e. the credits which are blocked u/s 17(5) of the Act and those that are used exclusively for making exempt supplies).

b. From the above, remove those invoices in respect of which no Form GSTR-1 is required to be filed by the supplier, for example IGST on import of goods, ISD credit, credit of taxes paid under reverse charge, etc. Denote this as Books Credit.

c. Reconcile the invoices of the Books Credit with the entries appearing in Form GSTR-2A to identify the invoices of eligible credit in respect of which the supplier has not uploaded details in his Form GSTR-1. Denote this as Pending Invoices. [Suggested to compulsorily identify these invoices and follow up for upload until the condition of rule 36(4) is met]

d. If feasible, identify the invoices pertaining to quarterly return filers. Denote this as Quarterly Invoices.

e. Calculate Available Credit = Books Credit – Pending Invoices + Quarterly Invoices.

f. If this Available Credit is approximately 84% of the Books Credit then the entire Books Credit can be availed, as it would satisfy the condition of rule 36(4). [As per rule 36(4) taxpayer can avail invoices appearing in Form GSTR-2A (assuming all are eligible credit) + 20%. Thereby, assuming 84% of the credit is appearing in Form GSTR 2A then 20% of this 84% would be approximately 100.8%. Thereby denoting that entire credit as per books can be availed]

g. Else calculate Eligible Credit = Available Credit + 20% of Available Credit.

If it seems cumbersome to follow steps f) and g) above, the taxpayer can avail the entire Books Credit and follow with the suppliers of Pending Invoices to ensure that by the due date of Sep ’20 return (i.e. 20th Oct ’20 at present) the Form GSTR 2A of the taxpayer contains at least 84% of the Books Credit. Thereby, the credit availed during the year without following steps f) and g) above would attract only interest liability (@ 24% p.a.) as per section 50(3), at the most (assuming that the credit is utilized).

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Tags : GST, Rule 36(4), 20% ITC Restriction