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PROBLEMS IN CLAIM OF ITC under GST

Consequent to certain recent amendments to CGST Rules, there are lot of confusion
amongst the tax payers and their reps in the matter of claiming ITC on the purchases by a
tax payer from other registered tax payer. Let us discuss the issue in detail.

Section 16 of CGST Act 2017 generally provides for the claim of ITC on the inputs purchased
from other registered dealers. Rule 36 of CGST Rules prescribes the conditions for such claim of
ITC. Now by Notification No. 49/2019 Central Tax dated 9-10-2019, among other amendments,
the following sub rule has been inserted to Rule 36.

“(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 above amendment is effective with effect from 9-10-2019. The implication of these
rules is to the effect that the ITC of a dealer is based on the details of sales uploaded by the
seller in Form GSTR-1 and auto-populated in buyer’s GSTR-2A. Detailed clarifications have
also been issued by the GST Policy Wing in Circular No. F.No.CBEC- 20/06/14/2019-GST
dated 11-11-2019, with illustrations.

Hitherto, ITC is being claimed based on the tax invoices available with the tax payer and the
taxes paid and shown in the invoices were taken as ITC while filing the monthly return in Form
GSTR-3B. Now such claim is restricted to the sales reported and uploaded by the seller and
shown in GSTR-2A of the buyer. In respect to sales not uploaded by the suppliers in their GSTR-
1, the new rule prescribes the eligibility of ITC at not more than 20 percent of the available ITC
as per GSTR-2A (NOT 20% of the omitted purchases!). Hence in case of mis-match between the
purchase account of the dealer and the amount auto-populated in GSTR-2A, ITC is eligible on
100% of the GSTR-2A amount plus 20% of the same amount.
The illustrations in the circular show certain type of transactions, which are not in full shape. Let
us consider some illustrations as per the new rules.

a) ITC as per GSTR-2A auto populated based on GSTR-1 of seller ₹ 6,00,000-00


b) Total ITC as per the tax invoices with the buyer ₹ 8,00,000-00
c) Hence ITC not covered by GSTR-2A ₹ 2,00,000-00
d) In this case ITC is eligible as worked out below:
100% of amount in (a) ₹ 6,00,000-00
20% of amount in (a) NOT 20% of (c) ₹ 1,20,000-00
Total ₹ 7,20,000-00

In the above case, though the tax payer is in possession of invoices for total ITC of ₹ 8 Lakhs, he
is eligible for ITC of ₹ 7.20 Lakhs only.

Working out 20% on the auto-populated amount instead of missing amount may create a funny
position which is given below:

a) ITC as per GSTR-2A auto populated based on GSTR-1 of seller ₹ 6,00,000-00


b) Total ITC as per the tax invoices with the buyer ₹ 7,00,000-00
c) Hence ITC not covered by GSTR-2A ₹ 1,00,000-00
d) In this case ITC is eligible as worked out below:
100% of amount in (a) ₹ 6,00,000-00
20% of amount in (a) NOT 20% of (c) ₹ 1,20,000-00
Total ₹ 7,20,000-00

Some body wonders how ITC in excess of invoices can be availed as worked out below. BUT the
new rule does not fixed this percent on a specific value but only as “not exceeding 20%”. Hence
in the above illustration only ₹ 1 Lakh alone can be added to the amount reflected in GSTR-2A.
Here the anomaly of the provision surfaces. In the example one, the ITC is allowed without
GSTR-2A as ₹ 1.20 Lakhs against the actual amount of ₹ 2.00 Lakh. In the second example, the
ITC is allowed without GSTR-2A as ₹1.20 lakhs against the actual amount of ₹ 1 Lakh.
The new provisions, in a way make it compulsory on the part of the suppliers to file the sales
details in GSTR-1 before the due date - 11th of the succeeding month. If this provision is strictly
followed by the suppliers there may not be problem in claiming the ITC by the buyers. The
Chamber of Accounts, Madurai has since resolved to take credit only the amount to the extent
of amount shown in GSTR-2A and informed so to their clients.

The problem does not end there. There may be several defects in uploading GSTR-1 not on the
part of the supplier but due to well known ‘glitches’ of GSTN. One such instance has been
brought to our notice.

A tax payer, while viewing the auto-populated GSTR-2A for the month of October 2019 found
that in respect of a seller “Counter party Status” shows as “NO”. See the following image.

When the sellers GSTN in the above page is accessed, B2B Summary page shows as “Uploaded
by supplier, as follows.
Here what the seller has not understood is the fact that though the seller has uploaded the
details of sales in GSTR-1 the same has not yet been “filed”. This cannot be properly explained
by his consultant and hence the problem exists for the buyer.

One more important factor in this issue. An eligible seller might have preferred to file the return
in GSTR-1 on quarterly basis and hence the sales by him in October 2019 is due for reporting
only on 31-01-2020. The buying tax payer, being monthly return filer cannot compare GSTR-2A
in respect of these purchases from quarterly based dealer. It is an important anomaly in the
new rules.

The amender Rule 36 (4) came into effect from 9-10-2019 only. It has also been clarified as “The
restriction of 36 (4) will be applicable only on the invoices/debit notes on which credit is availed
after 09-10-2019. (Issue No. 1 in the clarificatory circular referred above). Just like some of the
tax payers and their reps, even the taxing officials has not properly adhered the effective date of
this new rule.

An official in GST-Centre has issued notice to a tax payer proposing reversal of ITC as per the
provisions of new Rule 36 (4) for the month of September 2019 itself. Image follows:
Generally in the matter of claiming ITC under GST there are lot of conflicts in the provisions and
regulations. Section 16 of CGST Act 2017 prescribes the “eligibility and conditions for taking
input tax credit”. Sub-section (2) (a) mandates that the dealer should be in possession of proper
tax invoice. But sub-section (c) specifies that the tax so charged in the invoices has been actually
paid to the Government by the seller. This mandatory direction unnecessarily adds burden on
the buyer. How it can be expected in the business circles one buying dealer knows that the seller
has actually and correctly reported his sales and paid tax. In this context the High Court of
Madras in the case of Althaf Shoes (P) Ltd. Vs, Assistant Commissioner (CT), Valluvarkottam
Assessment Circle, Chennai-6 reported in [2012] 50 VST 179 (Mad) where in the Hon’ble High
Court of Madras has held as follows;

“Held, that a perusal of rule 10 of the Tamil Nadu Value Added Tax Rules,
2007 read along with section 19(1) of the Tamil Nadu Value Added Tax Act,
2006 made it clear that so long as the purchasing dealer had complied with
the requirements as given under rule 10(2), the claim of the purchasing
dealer could not be denied by the Department. The circular issued by the
Commissioner clearly stated that so long as the vendor was found to be a
registered dealer on the files of the Department, the claim of the dealer for
refund could not be rejected nor delayed. The mere fact that the Department
had not made an assessment on the dealer’s vendor, per se, could not stand
in the way of the assessing officer considering the claim of the dealer under
section 19 of the Act. Going by section 17 which provided that the burden on
the purchasing dealer rested to the extent of showing that he was not liable
to tax under the Act and read in the context of the fact that the petitioner-
dealer had given his sellers’ TIN number and had also produced the invoices
evidencing the purchase of materials paying tax, the Department could not
successfully canvass its claim that the petitioner was not entitled to have the
refund. It was admitted that the petitioner’s vendors were all registered
dealers on the files of the Department and that the petitioner had also given
the TIN number of these vendors. When such particulars were available, it
was for the Department to take necessary action against the vendors, who
had not remitted tax collected by them to the State. Without taking recourse
to that, the Department could not deny the claim of the petitioner.”

In final I am of the considered view that the system of claim of ITC under GST and the new rules
prescribed may be considered as unreasonable, against the principles of natural justice if tested
in legal forums.

There is some unconfirmed news that some tax payers in Chennai have preferred WPs on this
subject before the High Court of Madras.

Let us hope that a proper salvation would be received soon.

By S. SUTHANTHIRANATHAN
Assistant Commissioner (CT) (Rtd) Madurai
Registered GST Practitioner