Inconsistency in Section 16(2)(c) and New Amendment to Rule 36(4) of the CGST Act

Input Tax Credit (ITC) means availing the credit of Goods and Services Tax (GST) which a buyer has paid to purchase goods and services that he uses in the course of his business. The input credit mechanism is available to a registered person being a manufacturer, agent, supplier, aggregator, e-commerce operator, etc.

To claim the ITC under the GST regime, the registered person must have a tax invoice and should have received such goods or services as mentioned in the tax invoice. There are more conditions under the GST Act for the taxpayer to fulfil before claiming ITC.

Section 16(2)(c) Decoded

As per Section 16(2)(c) of the CGST Act, 2017, a buyer can avail the input tax credit on the purchase of goods and services, but such ITC will depend upon payment of GST by his supplier on the said supply. The supplier has to settle the tax on the said supply of goods or services either in cash or through allowable ITC.

A supplier has to upload his Business to Business (B2B) supplies on the common portal in GSTR-1. The system allows the buyer to check whether the seller has uploaded the said supply on the portal and registered the transaction. In case the seller doesn’t upload the said transaction on the GST portal, the buyer isn’t allowed to claim the ITC on such a transaction. Section 16(2)(c) won’t allow the buyer to avail the ITC unless such a supplier has paid tax on the said supply of goods or services either in cash or through allowable ITC.

All about Rule 36(4) Governing Input Tax Credit

Till 9th October 2019, assessees were allowed to claim the input tax credit by self-declaring in GSTR-3B. There was no need of reconciling the ITC with the GSTR-2B. Even if the ITC amount reflected in GSTR-2A was lower than in the assessee’s books of accounts, the assessee could still claim ITC, which wasn’t reflected in the GSTR-2B as a provisional credit.

In February last year, an amendment to Section 16 was made, allowing buyers to claim the input tax credit on invoice or debit notes only when their supplier furnished such details in their statement of outward supplies and communicated to the buyer. Until last year, if the supplier uploaded some of the invoices in a later period, the buyer was able to claim the ITC up to 5% of such invoices pending to be uploaded.

From January 2022, claiming ITC on a provisional basis has been removed as per the revised Rule 36(4). The ITC is now only allowed once the supplier furnishes such invoices or debit notes in his GSTR-1, reflected in GSTR-2B.

A buyer must now have strict contractual terms with his supplier to offset any loss caused if the supplier fails to upload invoices. In short, the situation demands strong vendor management, a compliance system,  appropriate contractual safeguards and strict measures for recovering the amount paid to a supplier.

Inconsistency between Section 16(2)(c) and Rule 36(4) of the CGST Act

Due to the inconsistency of Section 16(2)(c) and Rule 36(4), a buyer will find it difficult to claim the ITC. A buyer who complies with Section 16(2)(c) and doesn’t claim ITC since his supplier hasn’t paid the tax on such supply will be able to claim the said ITC in the next month only when his supplier pays the tax. Rule 36(4) states that the buyer is liable to claim ITC reflected on the GSTR 2B only. In GSTR-2B, the outward supplies details would appear statically.

GSTR 2B will reflect the outward supplies details uploaded by the supplier between either of two due dates Invoice Furnishing Facility or Form GSTR-1. Consequently, the data reflected in the GSTR 2B of the succeeding month won’t contain the previous month’s date uploaded by his supplier. Therefore, the buyer is denied the ITC that he voluntarily left as his supplier didn’t pay the tax on such supply. 

Conclusion

All the above measures taken by the government is to reduce if not irradicate the practice of claiming the ITC by using fake invoices. However, putting the onus on the buyer to validate whether his supplier has paid the tax or not without providing a proper facility seems unfair. It would lead to unnecessary hardships for a genuine buyer who has paid his share of tax to his seller and has all the valid documents for claiming ITC.