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Avail ITC in GST as per Section 16(2)(aa)

By Annapoorna


Updated on: Feb 16th, 2024


5 min read

From 1st January 2022 onwards, businesses must claim Input Tax Credit (ITC) that only appears in GSTR-2B. With this, Rule 36(4) of the CGST Rules loses its purpose while the new clause (aa) under Section 16(2) comes into force. This article provides complete details about the change, how this change affects businesses, and how businesses can be prepared with Clear’s solutions.

What does the new clause (aa) under Section 16(2) state?

The CBIC has notified 1st January 2022 that the new condition in clause (aa) of Section 16(2) of the CGST Act will be implemented. It issued Central Tax notification number 39/2021 on 21st December 2021 to give effect to Section 109 from the Finance Act, 2021, containing this addition. 

Section 16(2) of the CGST Act contained conditions for recipients to fulfil before claiming ITC in their GSTR-3B. These included possession of a GST invoice, receipt of the goods or services, tax on it paid to the government, and GST invoice reported in GSTR-3B. 

The recently added condition allows you to avail ITC if your vendor declares that invoice or debit note in their corresponding GSTR-1 or Invoice Furnishing Facility (IFF). It must finally be found in your returns auto-generated under Section 38, such as GSTR-2B. It is a possible return instead of GSTR-2A due to its static nature and availability every month or quarter in line with GSTR-3B. 

The GST Council suggested an amendment to Rule 36(4) during the 45th meeting in September 2021. The amendment was notified on 29th December 2021 through the Central Tax notification no. 40/2021 to add the same condition that clause (aa) of Section 16(2) stated.

Impact of removing provisional ITC and how businesses can handle ITC?

The businesses will have additional responsibilities with the removal of this benefit. They will also face fresh challenges that can be addressed only with tech intervention. 

Any extra ITC claims and failure to comply with this new condition will leave your business liable to penalties or GSTIN getting suspended. If businesses fail to act sooner, it may lead to suboptimal ITC claims, negatively affecting its profitability and, in turn, its working capital. 

Although many businesses know the importance of frequent reconciliation, they depend on the 5% extra ITC every tax period. Currently, enterprises undertake reconciliations not very frequently or near the due date of returns. But from 1st January 2022, if you continue with this, it leaves businesses with no time for vendor communication and follow-ups for missing invoices.

Henceforth, ITC reconciliations should become dynamic, real-time, per payment cycle, preferably weekly or multiple times a week. You will notice that the manual route is complex, tiring and time-consuming.

Businesses generally reach out to their vendors on an ad-hoc basis or quarterly. It happens on phone calls, messages or emails. But these are detached from the ERP, so tracking becomes difficult. In the future, businesses must follow up with the non-compliant vendors in real-time and consistently nudge them to upload invoices. 

Holding payments of total invoice dues or GST amount can be adopted for driving non-compliant vendors once a quarter or year. However, companies did not implement vendor grading and strategies for fast uploading invoices. Payment for invoices not uploaded should always be tagged as “Hold GST until matched” when the invoice does not appear in GSTR-2B before the 14th of the month succeeding the quarter.

After this change, businesses must discipline defaulting vendors by holding payments at the invoice level and more often, particularly for the GST amount. 

How do Clear’s solutions help businesses with this change?

Every business needs a tech-based system to reconcile their purchase invoices frequently to identify missing tax credits. Enterprises must switch to cloud-based software solutions fuelled by artificial intelligence and machine learning. They must adopt a reliable system for two-way vendor communication in real-time, vendor compliance grading and automatically block payments.

Increased support cannot be expected from vendors since you are at risk of losing tax outflows if they fail to upload invoices. If vendors delay, enterprises will bear additional GST in cash until they comply. Hence, you can avoid the challenges by following the recommended actions. 

At Clear, we have prepared you for this change! We migrate the ITC claim action to ERP irrespective of the GSTR-2A or GSTR-2B reconciliation on the Clear GST Max solution.

We have configured the GSTR-2A vs Purchase Register(PR) tool for automating payment blocking in your ERP. Clear recommends using the GSTR-2B vs PR tool for accurate ITC claims on the Clear GST Max tool. You may also use the vendor portal for two-way communication with vendors, available on Clear GST Max.

Also, our Advanced reconciliation tool, easy vendor communication, 25+ comparison reports on Clear GST Max help tax professionals and business owners solve the issues caused by the change.

About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more

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Quick Summary

Businesses must now claim ITC in GSTR-2B post 1st January 2022. New clause (aa) under Section 16(2) is in effect, impacting ITC claims. Clear's solutions help businesses adapt to these changes.

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