The CBIC released an important notification on 9 October 2019, inserting a new sub-rule (4) under rule 36 of the CGST Rules, 2017, stating that provisional credit can be hereafter claimed in the GSTR-3B only to the extent of 20% of eligible ITC reflected in the GSTR-2A.
A circular clarifying the issues relating to the implementation of this new rule was released on 11 November 2019.
1. What is the new rule 36 (4) on provisional ITC in Form GSTR-3B?
As per the new sub-rule (4) inserted in rule 36 of the Central Goods and Service Tax Rules, 2017, a taxpayer filing GSTR-3B can claim provisional Input Tax Credit (ITC) only to the extent of 20% of the eligible credit available, in respect of invoices or debit notes, the details of which have been uploaded by the suppliers in the GSTR-2A. The effective date of implementation is 9 October 2019.
(The notification no. 49/2019- Central Tax dated 9 October 2019 adds a new clause to the rule 36 of CGST Rules).
The 37th GST Council meeting held on 20 September 2019 had announced that the provisional ITC claim will be restricted under the present GST return filing system of GSTR-1 and GSTR-3B. The ITC claim will not be allowed in full for any recipient if their suppliers have not furnished the details of their outward supplies.
2. How will this new rule impact taxpayers?
Before 9 October 2019, all taxpayers claimed ITC on a self-declaration basis in Table 4(a) of GSTR-3B. This means that they declared the summary figure of eligible tax credits under IGST, CGST, and SGST. There was no compulsion to reconcile the ITC figure with the GSTR-2A until now, although it was always advised.
Even if the GSTR-2A reflected less ITC than the books of account, taxpayers could still make their ITC claim in full in the GSTR-3B, and the unreflected amount was treated as provisional credit.
After the implementation of this rule, the provisional ITC amount will be restricted only to the extent of 20% of the eligible ITC value already reflected in the GSTR-2A for that period. Apart from the 20% of eligible ITC which a taxpayer can claim as provisional credit, the balance tax liability will need to be paid in cash.
This new rule could affect the working capital of a taxpayer, as he will be required to make GST payments in cash, despite having paid his supplier for the tax invoice raised to him and having eligible ITC in his books.
3. Example on how provisional credit will be calculated
Let’s decode the new rule on provisional ITC limit with an example. If a taxpayer is filing his GSTR-3B for the month of November 2019, here is how he would claim input tax credit in his GSTR-3B before and after the implementation of the rule.
(Amount in Rs)
|A||Eligible ITC* available in the Purchase register||1,00,000||1,00,000|
|B||Eligible ITC* available in the GSTR-2A||60,000||60,000|
|C||ITC that can be claimed as provisional credit||40,000||12,000 (60,000*20%)|
|D=B+C||Total ITC that can be claimed in the GSTR-3B||1,00,000||72,000|
|E=A-D||ITC not allowed in the GSTR-3B of November 2019||Nil||28,000|
[*Eligible ITC is the ITC relating to a taxpayer’s business activities such as purchases made, services received, capital assets bought, etc. which is eligible to be claimed to set-off GST liabilities. The GSTR-2A could also contain ineligible ITC reflecting that relates to expenses such as food, club memberships, personal expenditure, etc or even ITC mistakenly reflecting due to the wrong GSTIN entered by a supplier. Hence, only eligible ITC will be considered while calculating the limit for 20% provisional credit.]
Here is an example to understand how eligible ITC will be computed:
(Amount in Rs)
|Table 1: Computation of Eligible ITC as per Books of Accounts|
|A||ITC appearing in the books for Nov’19||1,20,000|
|B||ITC relating to business purchases for Nov’19 (eligible ITC)||1,00,000|
|C=A-B||Ineligible ITC reflecting in books in Nov’19||20,000|
|D=B||Total eligible ITC that can be claimed as per books for Nov’19||1,00,000|
|Table 2: Computation of Eligible ITC as per GSTR-2A|
|A||ITC appearing in the GSTR-2A for Nov’19||75,000|
|B||ITC relating to business purchases for Nov’19 (eligible ITC)||60,000|
|C=A-B||Ineligible ITC reflecting in the GSTR-2A in Nov’19||15,000|
|D=B||Total eligible ITC that can be claimed as per GSTR-2A for Nov’19||60,000|
|A (Table 1) – A (Table 2)||Total ITC difference (between the books and the GSTR-2A) not reflecting in the GSTR-2A for Nov’19||45,000 (1,20,000-75,000)|
|D (Table 1) – D (Table 2)||Eligible ITC difference (between the books and the GSTR-2A) not reflecting in the GSTR-2A for Nov’19||40,000 (Rs.1,00,000-Rs.60,000)|
As per the previous regulations, the taxpayer could have claimed the entire Rs.40,000 (Rs.1,00,000 – Rs.60,000) as provisional credit. Upon the enforcement of this rule, he will be able to claim only Rs.12,000 (Rs.60,000*20%) in his GSTR-3B of November 2019. The balance can be claimed in a later tax period once the supplier has uploaded the pending invoices.
4. How and when can the balance ITC be claimed?
The balance ITC that has not been claimed as provisional ITC may be claimed in the succeeding months once details have been actually uploaded by the suppliers. If a supplier has only uploaded part of the pending invoices in a later period, the taxpayer will be able to claim ITC only proportional up to 20% of these pending invoices uploaded.
Here is an illustration of how provisional ITC will be calculated in a later tax period, once pending invoices have been uploaded by suppliers:
(Amount in Rs)
|Computation of Provisional ITC on Pending Invoices Uploaded in December 2019|
|Sl. No.||Particulars||Case I||Case II|
|A||Provisional ITC claimed (as per example given above)||12,000||12,000|
|B||Provisional ITC remaining to be claimed (as per example above)||28,000||28,000|
|C||Eligible ITC uploaded by suppliers in the month of Dec’19||20,000||25,000|
|D=C*20%||Provisional ITC which can be claimed for the month of Dec’19||4,000 (20,000*20%)||5,000 (25,000*20%)|
|E=C+D||Total ITC that can be claimed in Dec’19 (ITC reported by suppliers + provisional ITC)||24,000||28,000^|
|F=B-E||Balance eligible ITC still not allowed as of Dec’19||4,000||Nil|
^Provisional ITC cannot exceed the total eligible ITC available. As the total eligible ITC available is Rs.1,00,000 and Rs.72,000 had already been claimed in the month of Nov’19, only the balance Rs.28,000 can be claimed now.
5. Important points to note while claiming provisional credit
1. The restriction on 20% provisional credit will not be supplier-wise. It will be linked to the total eligible ITC from all suppliers based on details uploaded in the GSTR-2A.
2. The restriction on provisional credit will apply to those invoices/debit notes which were supposed to be uploaded by the suppliers and have not been uploaded. This means that a taxpayer can avail full ITC in terms of IGST paid on imports, credit that has been received from an Input Service Distributor (ISD), credit from documents received under reverse-charge mechanism and any other such credit.
3. As GSTR-2A is a dynamic form which updates based on details uploaded by suppliers, the cut-off date for claiming provisional credit will be the due date of filing returns only. Hence, a taxpayer may claim up to 20% of ITC based on invoices uploaded by his suppliers as on the date of filing his GSTR-1.
4. If part of the pending invoices of a supplier are uploaded in a later month, the taxpayer must make sure that provisional credit does not exceed 20% of eligible ITC.
5. The provisional ITC availed in a tax period shall be limited to ensure that the total ITC availed does not exceed the total eligible ITC. This means that the LOWER of provisional ITC or difference in eligible ITC (between books and GSTR-2A) will be considered.
For Ex: If the suppliers have uploaded invoices having eligible ITC worth Rs.85,000 in the GSTR-2A, and the total eligible ITC reflected in the books is Rs.1,00,000, then the provisional ITC will amount to Rs.17,000 (Rs.85,000*20%). In this case, the provisional ITC claim will be capped at Rs.15,000 (Rs.1,00,000-Rs.85,000) as the total ITC claimed cannot exceed the total eligible ITC available in a tax period.
6. What can taxpayers do to mitigate issues arising from this rule?
- A taxpayer should have a full understanding of the invoices appearing in his GSTR-2A – the types of credit available, the extent of ITC reported and the cataloguing of its defaulting suppliers. This will help him raise accurate ITC claims.
- As the implementation of this new rule could impact a company’s working capital, businesses will need to invest additional time in managing their accounts payables more effectively.
- It becomes vital for a business to regularly rconcile their purchase data between their books and the GSTR-2A, identify mismatches and communicate the same to their suppliers so that they upload the missing invoices. Frequent following-up with vendors needs to be managed.
- A taxpayer could benefit by setting up an automated system of invoice tracking, with an in-built communication link with his vendors/suppliers. This will save effort, time and money in the long run.
- Small suppliers who do not use a software for keeping track of provisional credit claimed/claimable will need to be vigilant, and install a mechanism where the same can be effectively monitored. There is no functionality currently available on the GSTN, however, the system can check where ITC exceeds the 20% limit and the AO may question and send notices where excess ITC has been claimed.
7. How can ClearTax help?
The ClearTax’s Advanced Reconciliation feature helps identify gaps between the GSTR-2A and the purchase books. Users can choose to take suitable action on ITC claims by getting values as per the books of accounts and values as per the GSTR-2A with smart filters. Further, the tool eases vendor communication where users can get access to compliance reports which can be shared with multiple vendors with a click of a button.