Rule 37A of GST: ITC Reversal for non-payment of tax by supplier

Rule 37A of GST provides that the GST-registered buyers of goods and services must reverse Input Tax Credit (ITC) claimed before when their corresponding supplier fails to deposit such taxes in their GSTR-3B within a defined time. 

Continue reading the article to learn about the applicability, timelines, and procedure.

Background to Rule 37A of GST

The CGST Rule 37A is notified in compliance with clauses (c) and (d) of Section 16(2), read with Section 41(2) and its proviso under the CGST Act. 

Clause (c) states that buyers can claim ITC on a supply if the tax on the invoice is deposited with the government by the supplier or vendors, either in cash or by utilising ITC. 

On the other hand, clause (d) lays down another condition to allow ITC claims for buyers. Their corresponding supplier must have filed such GSTR-3B.

Section 41(2) states that the recipient of credit must reverse such ITC claims if the supplier has not deposited taxes. The proviso allows the buyer to reavail or re-claim such reversed ITC later when the supplier pays tax.

However, there were no corresponding CGST Rules to govern the procedure and timelines until CGST Rule 37A got notified.

Who must comply with CGST Rule 37A?

All regular taxpayers must comply with CGST Rule 37A. In other words, those taxpayers who file GSTR-3B and are eligible to claim input tax credit must abide by the rule. 

Hence, those filing GST returns either monthly (Forms GSTR-1 and GSTR-3B) or quarterly (using the Invoice Furnishing Facility (IFF), and Forms GSTR-1 and GSTR-3B) fall under the scope of this rule.

Further, those making interstate (IGST) and intrastate (CGST and SGST) purchases and wishing to claim ITC must comply with Rule 37A of GST.

Accordingly, all the composition taxable persons do not fall under the purview of this rule. Purchases made on a reverse charge basis will not attract this rule since the onus of paying tax lies on the buyer/recipient themselves.

Contents of Rule 37A of GST explained 

Below is the extract of the Rule 37A of GST from the CGST Rules-

Buyers will need to reverse ITC claimed on such supplies declared in the GSTR-1/Invoice Furnishing Facility (IFF) but not declared in GSTR-3B by the seller. 

Note that the below conditions must be satisfied for Rule 37A of GST to apply-

• The buyer has claimed ITC on such invoice based on the record shown in GSTR-2B.
• The supplier has not deposited the tax on such invoice/debit note 
• The supplier has not filed the GSTR-3B with the corresponding invoice/debit note

In simpler words, this rule applies when the value of supply in supplier's GSTR-1 is more than their GSTR-3B, or an invoice declared in GSTR-1 is missed out in GSTR-3B by the supplier or vendor.

The two provisos for the applicability of interest and for the provision of re-claims are explained in later sections of this article.

How to reverse ITC under Rule 37A of GST?

The recipient would have initially claimed the ITC appearing in GSTR-2B through Table 4(A)(5) of Form GSTR-3B. If CGST Rule 37A gets attracted, they must reverse such claimed ITC by reporting it in Table 4(B)(2) of Form GSTR-3B.

No interest gets attracted on ITC reversal if done within the defined time limit. However, interest gets attracted on ITC reversal if done after the defined time limit, explained in the next section.

Time Limit for ITC reversal under Rule 37A of GST

The buyer need not reverse ITC immediately upon knowing that GSTR-3B of the supplier was underreported for the ITC. They have time until a defined date of year following the financial year to which such ITC belongs. Accordingly, the timelines defined under Rule 37A of GST are summarised below in the table-

The taxpayers may get confused about the tax periods for GSTR-3B being referred by the rule. Hence, we can go by the government's clarification when it revised the annual time limit to claim ITC to 30th November of the year following the financing year.

The GSTR-3B filed on or before 30th September will imply-

• If your supplier files a monthly GSTR-3B- GSTR-3B of the August return period of the year after the financial year, where the supplier is a monthly filer. E.g., August 2023 for FY 2022-23.
• If your supplier files a quarterly GSTR-3B under the QRMP scheme- GSTR-3B of the quarter ending June of the year after the financial year, where the supplier is a quarterly filer. E.g., April-June 2023 quarter for FY 2022-23.

The GSTR-3B filed on or before 30th November will imply-

• If you (buyer) file a monthly GSTR-3B- GSTR-3B of October return period of the year after the financial year, where the supplier is a monthly filer. E.g., October 2023 for FY 2022-23. 
• If you (buyer) file a quarterly GSTR-3B under the QRMP scheme- GSTR-3B of the quarter ending September of the year after the financial year where the supplier is a quarterly filer. E.g., July-September 2023 quarter for FY 2022-23.

Date of applicability of Rule 37A of GST

Rule 37A of GST was added to the CGST Rules on 26th December 2022 vide the CBIC notification 26/2022. It shall apply for invoices or debit notes raised on or after 27th December 2022, when this notification got published in the official gazette. 

Hence, one must apply this rule for the financial year 2022-23 and onwards. Accordingly, for the first FY 2022-23 of its implementation, note the following dates for actions-

Failure to comply with Rule 37A of GST 

Buyers who fail to comply with CGST Rule 37A will be issued a GST demand notice demanding tax payment and interest to the extent of excess ITC claimed. The interest is charged as per Section 50 of the CGST Act, at 24% per annum for excess ITC claimed and utilised from the date of such utilisation until the date of payment.

Note that such interest is also payable when the buyer reverses ITC after 30th November of the year following the financial year.

Re-claiming ITC reversed under Rule 37A of GST

Rule 37A of GST also provides relaxation to buyers who genuinely have missed claiming their ITC due to the fault of the supplier. 

They can re-claim reversed ITC even after the time limit given above if the corresponding supplier- 

• Files the particular period's GSTR-3B after 30th September of the year following the FY OR
• Reports such as missed invoice/debit notes in any period's GSTR-3B filed after 30th September of the year following the FY.

AND

• Pays tax on such invoice/debit note after 30th September of the year following the FY 

The recipient can re-claim or reavail the ITC in Table 4(D)(1) of Form GSTR-3B of any subsequent return periods. Note that such re-claims are allowed despite the restriction put under Section 16(4) of the CGST Act.