Restrictions on Availment of Input Tax Credit in GST

Introduction

The indirect taxation system in the old regime was quite complex. The prevalent taxes were: Tax on provision of service (Service Tax); Tax on manufacture of goods (Excise Duty); Tax on distribution stage (VAT & CST); taxes like luxury tax; entertainment tax; Entry tax; Octroi; Research and Development Cess; and many more. Each of these was an independent tax with separate compliance requirements and different provisions. This led to difficulty for taxpayers to comply with the legal requirements. The aforesaid taxes were not interconnected. Therefore, it led to tax evasion. The biggest problem with the old tax regime was Cascading Effect of Taxation which GST seeks to eliminate. Taxes paid at an earlier stage of supply were not allowed to be set off against the output tax payable at the next stage of supply chain.

Goods & Services Tax is the biggest tax reform witnessed by India since independence. The new era looks forward to a nation which is homogenized through its taxation system and a common market. The ideology is “One nation, One market, One tax”.

GST is a tax that is collected at every stage of value addition and the credit of tax paid at the previous stage is available to set off the tax to be paid at the next stage of transaction. In technical terms this is nothing but Input Tax Credit. This eliminates cascading of taxes and in turn, helps lower the cost of the goods and services for the consumer.

Conditions for claiming ITC

Section 16(2) of CGST Act, 2017:

1.     The dealer is in possession of tax invoice or debit note issued by registered supplier.

2.     The goods/services must have been received.

3.     The tax charged in respect of such supply has been actually paid to the appropriate government, either in cash or through utilization of ITC.

4.     GST Return has been furnished.

Here, the major problem lies with the third condition. It is extremely difficult to establish whether tax paid to the supplier has actually been received by the Government or not. GSTR-2A reflects amounts shown in corresponding GSTR-1 of the supplier which is not the tax-paying return. Also, GSTR-3B (through which taxes are actually paid) does not require bifurcation of taxes bill-wise. This creates a problem. Most taxpayers do their GSTR-2A reconciliation with the books of accounts. However, it is not the absolute measure to determine the fulfillment of the given condition.

Payment within 180 days [Second proviso to Sec 16(2)]

Where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon [18% p.a. interest vide NN 13/2017-Central Tax dt. 28.06.2017]  in such manner as may be prescribed.

The above provision is a critical point as the normal credit cycle of many industries is greater than 180 days. This is extremely strange as in a way the Government is fixing the credit cycle of the taxpayers. Also, when the Government itself has received tax then why is the credit disallowed to the recipient? Advance Ruling Authorities have provided conflicting views in this matter.

Time Period to avail ITC

Earliest of the following:

1. Due date of furnishing return for the September month following end of FY

2. Furnishing Annual Return for FY 

Blocked Credits

Section 17(5) of Central Goods & Services Tax Act, 2017 states a list of supplies the tax paid on which is not eligible for credit. Some of the items mentioned therein are as hereunder:

Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following namely:-

(a)  Motor Vehicles & Other Conveyances

(b)  Outdoor Catering, Rent-a-cab, etc

(c)   Works contract services

(d)  Goods/Services for construction of immovable property

(e)  Goods/services or both on which tax paid under Sec 10

(f)    Goods/ services or both received by a non resident taxable person

(g)  Goods/ services used for personal consumption

(h)  Goods lost, stolen, destroyed, written off, disposed by way of gift or free sample

(i)    Tax paid in accordance with Sec 74, 129, 130

After the GST Amendment Act, 2018 several changes have taken place in the above section. Expenses related to motor vehicles and conveyances like maintenance, repair etc have also been disallowed.

GST is based on the concept of set-off of taxes paid in the earlier stage of value addition. A lot of services as listed above are disallowed under ITC. Hence, it appears that this section is kind of diluting the foundation or the strongest pillar of GST.

Rule 36(4) of CGST Rules, 2017

The newly inserted Rule 36(4) provides that a taxpayer can avail ITC pertaining to outward supplies not declared by his supplier in Form GSTR-1 only to the extent of 20% of the eligible credit available in respect of invoices declared by his supplier in Form GSTR-1 which is reflected in Form GSTR-2A. It is proposed to reduce the fraction of 20% to 10% in the GST Council Meeting held on 18th December, 2019. It is pertinent to note that the rule is not as easy as it sounds. When tried to be implemented practically the rule suffers the following drawbacks:

1.     How is the calculation to be done? Monthly, quarterly, cumulatively?

2.     How will the balance ITC be availed?

3.     How to deal with the adverse impact on working capital?

It can be concluded that this particular rule has been brought to ensure that taxpayers file their returns on time. However, the calculations involved behind it are cumbersome.