Dubiety and New Challenges While Availing Input Tax Credit

The Finance Act, 2022 made a lot of buzz around the changes/ amendments proposed in the Input Tax credit (ITC) mechanism. The said changes were in-line with the continuous endeavour of the Government of India to streamline the credit mechanism and to make it more digital, with an aim to eliminate the malicious practice of ‘fake invoice’. The said additional conditions/amendments for availing ITC were finally notified on 1 October 2022 and have now become a part of the Goods and Services Tax (GST) law.

In this article, we have focused on the practical challenges currently being faced by taxpayers due to the said key changes/ amendments:

GSTR 2B further restrains ITC

The government has added a stringent condition for availing ITC via newly inserted Section 16(2)(ba) which seeks to further restrain the availment of ITC. It stipulates that a registered person would be entitled to avail ITC in accordance with Section 16 only if the same is not restricted as per Section 38 (Form GSTR 2B - Communication of details of inward supplies and ITC).

Section 38 mentions that the recipient cannot avail credit if the supply is made by:

1. Any registered person within the period prescribed for taking registration
2. A registered person who has defaulted in payment of tax for a continuous period as prescribed
3. A registered person who, for a prescribed period, has paid lower tax in GSTR-3B than the tax payable as per the details furnished in GSTR-1
4. A registered person who has availed ITC in excess of the ITC under auto-generated statement e. Form GSTR 2B as per the limit prescribed
5. By such class of registered persons wherein the government specifies maximum portion of output tax liability which may be discharged through electronic credit ledger and compliance of same is defaulted
6. Such other class of persons as may be prescribed

Though the period, limits and percentage of restrictions are yet to be notified by the government, presently there is no mechanism for a registered person to ensure that the ITC proposed to be claimed is not covered under the above restrictions.

Further, though the intent of the government is to auto-populate the said details in GSTR 2B, there could be many practical and genuine issues which may also fall in the above categories of restricted vendors. For instance, a registered person cannot avail ITC in excess of the ITC that is auto-generated. However, the auto-generated ITC statement is populated for the GST return period, whereas ITC may be availed cumulatively in relation to past period transactions.

To illustrate the above, ITC proposed to be availed for the GST return of October 2022 may comprise of invoices dated August, September and October 2022. These details appear in the auto-generated statement of the respective month. In such case, the ITC proposed to be availed for the month of October 2022 will appear to be more than auto-generated statement of October 2022, however, the same pertains to the details that were already auto-generated in the past period (i.e. August and September 2022).

Another restriction imposed is that the tax paid under GSTR 3B is lower than the tax payable under GSTR1. While ensuring compliance with this restriction, the supplier may encounter a practical challenge about the non-allowance of reporting of ‘negative values’ under GSTR 3B. To elaborate further, there could be a situation wherein credit notes are greater than invoice value for a tax period. While the negative value can be reported under GSTR 1, GSTR 3B restricts negative value reporting. Therefore, the value of credit notes needs to be carried forward and adjusted in the subsequent tax period. While filing returns for the subsequent month, GSTR 3B would disclose lower tax payments than the tax payable under GSTR 1 (since the previous month’s negative value would be required to be adjusted). The same may flag trouble for the company due to this stringent condition mechanised on the GST portal. Therefore, it is pertinent to see how the restrictions are being implemented by the government.

Tax charged by a supplier is paid to the government – How do you know?

The recent amendment about conditions for availing ITC requires a recipient who has availed ITC to reverse the same, along with applicable interest wherein the supplier has not paid the tax. Further, it also states that the ITC reversed can be re-availed once the supplier makes the tax payment. However, the interest paid on such reversal becomes a cost for the recipient.

Presently, there is no mechanism available with the recipient of ITC to ensure that the tax discharged to the supplier is paid by him to the government. Form GSTR 2B is auto-generated and basic details of outward supplies reported by the supplier, whether the liability declared under form GSTR 1 is paid by the supplier under form GSTR 3B cannot be ensured basis auto-generated form GSTR 2B.

Further, the GST portal displays a ratio depicting the percentage of liability of tax paid under form GSTR 3B vis-à-vis the value of liability payable disclosed under form GSTR 1. However, there is no transaction- wise reconciliation of details reported vis-à-vis tax payment to substantiate the computed ratio. Accordingly, there is no mode for a recipient of ITC to ensure that the corresponding tax is discharged by the supplier to the government.

Time limit to avail ITC

The time limit to avail ITC has been extended till 30 November, following the end of the financial year, to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier. However, the said invoice also needs to be reflected in GSTR 2B for availing credit.

Form GSTR 2B displays ‘ITC not available’ under form GSTR 2B[1] in a scenario wherein the time limit to avail ITC for a particular FY has lapsed (i.e. before 30 November following the end of the FY or furnishing annual return whichever is earlier) as per Section 16(4) of CGST Act, 2017.

Practical challenges on the GST portal comprise of scenarios wherein there is a delay in filing of the return by the supplier, due to the cut-off dates maintained under the GST portal, and the transaction gets reflected under the subsequent month.

For example, the supplier proposes to report transactions pertaining to FY 2021-22 under the form GSTR 1 for the month of October 2022, however, there is a delay in filing the return by the supplier. Accordingly, as per the cut-off dates on the GST portal for GSTR 2B, the transaction pertaining to FY 2021-22 would not get reflected in the inward supplies details of the recipient for the month of October 2022 in GSTR 2B generated on 12 Nov 2022. Therefore, while the transaction is reported by the supplier under the outward supplies return, due to the delay in reporting the same, the ITC may not get reflected in GSTR 2B before 30 November 2022 (due date for claiming ITC for FY 2021-22). This may lead to a lapse of ITC for the recipient, even though the same is allowed as per the GST laws.

Our take

With the above-discussed changes/ amendments made in ITC, the government has cast an additional responsibility on the recipient’s shoulder to ensure that their suppliers are tax compliant, for them to claim the ITC. However, the success of the amendments would largely depend upon the infrastructure the government puts in place to provide required automated reports to the taxpayers and provide quick resolution for them, to sustain uninterrupted business flow.

Further, it may be the right time now to implement section 149 which talks about GST compliance rating score to be provided by the government basis the compliance record, which would in turn help taxpayers in dealing with only highly rated suppliers and will thereby, motivate the suppliers to have and maintain a good rating/ score.