Eligibility of ITC under GST – A Detailed Analysis after Finance Bill 2022

Two things in life are inevitable, i.e. Death & Taxes.
 
Taxes are the primary source of income for any Government, & more explicitly stating, GST leads among them for our Economy. Goods and Service Tax in India (GST) came into force on 1st July 2017; since then, it has undergone many changes to be the best of its kind, but some of the recent changes have hurt the very Idea of GST.
 
Input Tax Credit (ITC) is the one such vulnerable area of GST that has never been free of controversies & doubts & we are here to discuss the same. It can directly affect the tax payments to the Government & accordingly limit to claim ITC while GST Return Filing to set off our Output Tax liability was already much more complicated. Further, with Finance Bill 2022, there is more burden on the taxpayers relating to ITC.
 
The only part of GST that now remains trouble-free is Online GST Registration in India & filing of GST returns online in India for the reason that government won’t ever refuse to have GST registration & some tax payments thereof.
 
So let us discuss what our current law says about ITC& what are some proposed changes yet to be notified & how will they impact GST Return Filing Solutions.

The OG Law currently in force

Conditions for taking ITC have been stated in Section 16(2), which says:
 
The registered person can claim ITC on a supply only if the following four 
conditions are fulfilled:

(a) Possession of tax-paying document

: ITC can be availed based on the following docs: 
 
1: Invoice issued by the seller of goods and/or services 
 
2: Invoice issued by the recipient receiving goods and/or services from an unregistered person with the proof of tax paid, in case of reverse charge 
 
3: Debit note issued by the seller 
 
4: Bill of entry or any other similar document prescribed under the Customs Act 
 
5: Revised invoice 
 
6: Document issued by Input service distributor
 
Rule 36 gives certain limitations to the above point that are as follows:
 
* Subrule (3) states that no ITC on tax paid towards demands involving fraud: When taxis paid for any demand that has been raised on the want of any fraud, misstatement or suppression of any facts cannot be availed as ITC
 
* Subrule (4)states that no ITC shall be availed by a registered person in respect of invoices or debit notes the details of which are required to be furnished under subsection (1) of section 37 unless:
 
1: The details of such invoices or debit notes have been furnished by the supplier in the statement of outward supplies in FORM GSTR-1 or using the invoice furnishing facility; and
 
2: The details of such invoices or debit notes have been communicated to the registered person in FORM GSTR-2B. 
 
The above mentioned subrule (4) was updated recently after the notification as the previous one talked about the “Provisional ITC” where taxpayers were allowed to take credit of 105% of eligible ITC, has now been completely eliminated. 

(b) Receipt of the goods/services: 

The registered person taking the ITC must have received the goods/services.
 
GST also talks about the “Bill to Ship to” Model. As per the Model, the goods are delivered to a third party - ‘C’ on the order of the customer - ‘B’ who purchases the goods from the vendor – ‘A’. In simple words, ‘A’ bills to ‘B’ but ships the goods to ‘C’ on the direction of ‘B’. In effect, two supplies take place in this scenario, viz., from ‘A’ to ‘B’ and from ‘B’ to ‘C’. Thus, under this Model, the customer (registered person) who purchases such goods does not receive the said goods. For such cases, it will be deemed that the customer has received the goods.

(c)Tax applicable on supply actually paid to Government: 

The seller should have to actually pay the tax levied on the goods and/or services for which ITC is being taken, either in cash or by utilizing ITC. However, section 41 allows the taxpayer (recipient) to take ITC provisionally on a self-assessment basis. The self-assessed ITC gets credited to the taxpayer’s electronic credit ledger on a provisional basis in terms of section 49(2). Thus, even if the purchaser has paid the tax to the seller, he is only eligible for ITC when the seller deposits the tax so collected by him to the Government.

(d) Filing of return: 

The registered person taking the ITC must have filed his GST Returns Online in India under section 39. Presently, a summary return in form GSTR-3B is being filed. Thus, a taxpayer should file GSTR-3B to avail ITC on eligible inward supplies.
 
However, mere payment of tax & withholding of the rest of the amount is not enough to deal with the law. GST also states that the purchaser must have paid to the seller the total value of the goods/services along with the tax within 180 days from the date of issue of the invoice on which ITC has been claimed. If failed to do so, the corresponding ITC availed by the purchaser would get added back to his GST tax liability, along with interest. Interest is @ 18% from the date of availing of ITC to the date of reversal of amount in the output tax liability & provided it is actually paid.
However, once the purchaser makes the payment of the goods /services along with tax, he will be eligible to claim the ITC again without any time limit.
 
Talking about time limit for claiming ITC for a financial year, according to current law, is:
 
1: Due date of furnishing GSTR-3B for the month of September of the next financial year or
 
2: The date of annual return filing (Due date of Annual Return is 31st December 20xx, that is filed in GSTR-9), whichever is earlier.
 
Whereas, GST Council has now proposed a change in the Finance Bill 2022 regarding the time limit for availing ITC, which is yet to be notified, i.e.
 
30th November of the following year, or
 
Date of annual return filing, whichever is earlier.

Coming to 2022

A lot of things have changed. Consequently, the law relating to ITC is also now being completely revamped with the help of Finance Bill 2022 in a more catastrophic manner rather than being fructuous. Some of the amendments have been notified & made effective from 1st January 2022, while some are still yet to be notified. 
 
The most significant change is regarding Section 38 (It relates to Furnishing details of inward supplies), which will affect most taxpayers in terms of availment of ITC. However, the change is still yet to be notified, but it is the most heated debate among the professionals, taxpayers & other businesses & something everyone is tensed from. This is all just because ‘Conditions’, should rather say ‘Restrictions’ have been jacked up that even Section 41,42 & 43 have been eliminated from the law related to Claiming of Provisional ITC, the practice of which was being carried out before the change.
 
Let us understand what the existing Section 38 says & what will be it after the proposed amendment:
 
Let us see what existing Section 38 of the CGST Act says:
 
1: The existing Section governs the furnishing of details of outward supplies by the seller, followed by the buyer accepting such purchases and claiming ITC in his GSTR-3B on the same. It is based on a two-way communication methodology. However, the same was never a two-way communication practically. This was never actually implemented & there was no option on the portal to accept the inward supplies. Only we could view our inward supplies in GSTR-2A/GSTR-2B.
 
2: In a nutshell, the purpose of Section is to reconcile our purchases with the outward supplies (sales) reported by the supplier. In case of any mismatch found in reconciliation, the supplier should communicate the same. Accordingly, payment of any tax and interest in respect of any short sales/wrongly claimed ITC should be paid back within the prescribed time to the Government.
 
The revised Section 38 (Communication of details of inward supplies and input tax credit) in the Finance Bill 2022 proposes to impose more restrictions than ever existed & eliminate the two-way communication that never actually followed.

The new Section shows two things: 

1: Firstly, details of outward supplies furnished by a taxpayer’s suppliers will be made available in an auto-generated statement (that was already the actual practice),i.e. the GSTR-2B.
 
2: Secondly, it prescribes the contents of the GSTR-2B. In simple words, it tells taxpayers the transactions in which input tax credit may be availed and may be restricted,i.e. eligible and ineligible ITC.
 
The new Section states that ITC cannot be claimed more than what reflects in GSTR-2B. It further states the ITC that is eligible to avail & that is restricted as compared to earlier law where we could avail ITC on a provisional basis. Below are the cases in which we cannot claim ITC, although reflecting in GSTR-2B:
 
1: ITC may not be eligible on the supplies furnished by a supplier within the prescribed period (to be prescribed) after the supplier’s registration under the GST law (i.e. Fresh Registration).
 
2: ITC may not be eligible on supplies furnished by a supplier who has not paid taxes and where such default continues for a prescribed period (to be prescribed).
 
3: ITC cannot be claimed on such supplies on which the seller has higher tax liability than the tax paid actually during the said period and by such limit prescribed (to be prescribed).
 
4: ITC may not be eligible for availment on supplies furnished by a seller where the seller has claimed ITC more than what was actually allowed as per his GSTR-2B. This part also says that the excess is determined by the limit prescribed (to be prescribed).
 
5: ITC may not be availed on supplies furnished by a supplier who has failed to pay their tax liability as per their outward return, subject to the conditions and restrictions prescribed (to be prescribed).
 
6: ITC may not be availed on supplies furnished by a supplier where the supplier belongs to a certain class of persons as may be prescribed (to be prescribed).
 
From the above, we can see what the Government is trying to implement; earlier, law (theory) & practice were different, but now the change in law will support the existing CGST Rules that are in place/practice to end the gap. Further, so much of restrictions in terms of conditions have been imposed. 
 
Thus, we can say that our right to claim ITC freely, which all taxpayers enjoyed till now, has now faded away. We can only claim ITC as per GSTR-2B & that too, not 100%.

In conclusion, the Goods and Services Tax (GST) in India has undergone various changes, but recent amendments have impacted the idea of Input Tax Credit (ITC), a vulnerable area of GST. The proposed changes in the Finance Bill 2022 impose more restrictions on claiming ITC, limiting taxpayers' ability to avail it freely. The new law aligns the practice with existing CGST Rules, narrowing down the scope of eligible ITC. This indicates a shift away from the previous flexibility and poses challenges for GST return filing solutions.

Unleash the Power of ITC: Navigate the Changes and Optimize Your GST Return Filing! Mail us Today at: info@manishanilgupta.com.

Disclaimer: This content is purely for knowledge and educational purposes. It contains only general information and references to legal content. It is not legal advice, and should not be treated as such.