The Central Government has imposed restrictions on availment of ITC to the extent of only matched ITC in GSTR-2A for the reasons best known to the Central Government may be..!!

Rule 36 (4) was introduced vide Notification No.49/2019-Central Tax w.e.f 09.10.2019 and reads as under:-

“(4) 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 under sub-section (1) of section 37.”

The 20% is reduced to 10% w.e.f. 01.01.2020

It evident from above that Rule 36(4) aims to limit the availment of ITC in respect of invoices missing from Form-GSTR 2A.

I have received many calls from my clients and the issue was also deliberated and discussed in my professional circle but, unfortunately, we are clueless as to how the above provision can be implemented practically:

1. Violation of the Right of the Buyers/ Assesses:

There is no basis for restriction of ITC to the extent of 20% and then also reducing the same to 10% of the matched ITC in GSTR-2A. There is a clear violation of the basic right of the buyer of the goods and services to avail the ITC especially under the circumstances where, they have physically received the goods and services, they are in possession of the original copy of the invoice and they have also made the payment to the supplier of goods/ services along with GST amount.

2. The amendment is against the settled principles of law:

We are aware about the doctrine of “Vicarious Liability” i.e. no person can be or shall be punished for the act of others. If, the supplier of goods/ services is failed to comply with the provisions of the GST, how the recipient is punishable for the same?

3. Seamless chain of ITC under GST is in big question:

GST is based on the concept of “SEAMLESS ITC”. The restriction on ITC to the recipient without any basis is apparently breaking the chain of ITC even after complying the GST provisions by the recipient.

4. Government has failed to report the fault of the supplier of Goods/ services:

It is upon the Government to recover the tax from the suppliers who are indulging in issuing fake invoices and not depositing tax with the exchequer or failed to understand the provisions of GST. It is now evident that the burden has been shifted to the recipient of goods/ services to ensure that his suppliers are paying tax and filing GST returns regularly. The provision of 2A matching is apparently increasing the compliance cost and causing huge cash-flow impact to the taxpayers.

5. Losing competitiveness in the domestic as well as international market:

Even after complying honestly with the GST provisions, the ITC is disallowed to the recipient merely because non-compliance at the end of the suppliers of goods/ services, the GST would become cost to the recipient of the goods/ services which will eventually result in increase in the prices of goods/ services.

6. GSTR-2 is still not operational:

Though GST Law stipulates GST return in Form GSTR-2 which enables recipient to upload the missed invoices by the supplier of goods/ services, the same is not operational even today. Consequently, the ITC of GST in the hands of the recipient of goods/ services is absolutely at the mercy of the suppliers.

7. Government has failed to provide mechanical ITC matching and reconciliation:

It is evident that in the proposed era of ‘Digital India’ and ‘Ease of doing Business’, the Government has certainly failed to provide the mechanical provisions of ITC matching and reconciliation and merely shifted the burden on the recipient of goods/ services to find the defaulters.

8. Non-availability of ITC due to ITC mismatch, GST refunds are also getting reduced drastically for exporters:

It is again needless to mention that due to mismatch of ITC, the GST refund on account of Zero Rated Supply will get reduced drastically which also has negative impact on the pricing of the export goods. Otherwise also exporters are suffering due to delay in getting GST refunds, now, this provision will badly impact their product pricing i.e. increase in product price as disallowed ITC will mechanically get added in the costing of goods. This has direct impact on international competitiveness of Indian exporters.

9. The provision of matching of ITC is ultra-vires to Section 16 of the CGST Act:

Since the provision of matching of ITC has been separately provided vide Section 43 of the GST Act and Section 43A is yet to be implemented, the matching of ITC and restriction thereof cannot be principally introduced by way of Rule as the source section i.e. Section 16 and Section 43 of the GST Act are silent on the same. Hence the matching of ITC provision is ultra-vires to Section 16 of the GST Act.

10. Valuable time of professional fraternity is losing:

The valuable time of the practicing Chartered Accountants and Lawyers shall be committed in execution of the law of land and not to find out the defaulters who are not complying with the law or who don’t want to comply. But certainly, Chartered Accountants and Lawyers are not for doing stereo-type job of matching ITC for Clients.

11. The vires of Rule 36(4) has been challenged before various High Courts:

Last but not the least, the Division Bench of Rajasthan High Court in M/s. Ravi Infrabuild vs. UOI & Ors. (D.B.C.W.P.No.3559/2020), issued notices to Union of India, Central Board of Indirect Taxes and Customs, New Delhi and Assistant Commissioner, Central Goods and Service Tax Division – B, Udaipur where the vires of Rule 36(4) of CGST Rules, 2017 has been challenged. Similar Writ Petitions have been filed before various other Hon’ble High Courts of the country, which are pending consideration.

One can even accept to avail ITC only after it appears in the GSTR-2A without any time limit. In other words, ITC can be availed whenever invoices will appear in the GSTR-2A without any time limit. But restricting ITC availment to 10% of matched ITC and then or if, one opts to avail ITC only after they appear in GSTR-2A then time limit of six months from the end of previous financial kills the ITC. Therefore, a serious attention of Government is essential ASAP.