Provisional ITC Under GST | Rule 36(4)

The CBIC released an important notification on 9th October 2019, inserting sub-rule (4) under Rule 36 of the CGST Rules, 2017, governing provisional input tax credit (ITC). Under the GST law, taxpayers could claim an extra amount of ITC as provisional ITC for invoices not appearing in the GSTR-2B. This amount was restricted to 5%* of the eligible ITC reflected in the GSTR-2B**

However, this rule was amended via Central Tax notification 40/2021 on 29th December 2021. Accordingly, a taxpayer can claim Input Tax Credit (ITC) only if the same appears appears in their GSTR-2B. Hence, no provisional ITC can be claimed from 1st January 2022 onwards.

The CBIC has released Circular 123/2019 clarifying the issues relating to the implementation of the original rule 36(4) on 11th November 2019. 

*With effect from 1st Jan 2021 until 31st Dec 2021. However, it was 10% between 1st Jan 2020 and 31st Dec 2020 while was earlier restricted to 20% for the period from 9th Oct 2019 up to 31st Dec 2019. 

**Was GSTR-2A up to July 2020.

Latest Update

1st February 2022
Budget 2022 updates-
1. ITC cannot be claimed if it is restricted in GSTR-2B available under Section 38.
2. Time limit to claim ITC on invoices or debit notes of a financial year is revised to earlier of two dates. Firstly, 30th November of the following year or secondly, the date of filing annual returns.
3. Section 38 is completely revamped as ‘Communication of details of inward supplies and input tax credit’ in line with the Form GSTR-2B. It lays down the manner, time, conditions and restrictions for ITC claims and has removed the two-way communication process in GST return filing on the suspended return in Form GSTR-2. It also states that taxpayers will be provided information of eligible and ineligible ITC for claims.
4. Section 41 is also revamped to remove the references to provisional ITC claims and prescribes self-assessed ITC claims with conditions.
5. Sections 42, 43 and 43A on provisional ITC claim process, matching and reversal are eliminated. 

29th December 2021
CGST Rule 36(4) is amended to remove 5% additional ITC over and above ITC appearing in GSTR-2B. From 1st January 2022, businesses can avail ITC only if it is reported by the supplier in GSTR-1/ IFF and it appears in their GSTR-2B.

21st December 2021
From 1st January 2022, ITC claims will be allowed only if it appears in GSTR-2B. So, the taxpayers can no longer claim 5% provisional ITC under the CGST Rule 36(4) and ensure every ITC value claimed was reflected in GSTR-2B.

Revised Rule 36(4): Removal of provisional ITC in GSTR-3B

Provisional ITC means ITC that is claimed by buyers in their GST returns for which the invoice is not reported or yet to be reported by their vendors or suppliers with the government. The ITC claims on a provisional basis have been removed from the revised Rule 36(4) from 1st January 2022. It is done based on the inclusion of new clause (aa) under Section 16(2) of the CGST Act.

Previously, as per the sub-rule (4) inserted in rule 36 of the Central Goods and Service Tax Rules, a taxpayer filing GSTR-3B can claim input tax credit only to the extent of the eligible credit available in GSTR-2B. Until 31st December 2021, this was 105% of the ITC in GSTR-2B/ GSTR-2A between 1st Jan 21 up to 31st Dec 21). 

The amount of eligible credit is arrived upon based on the input tax credit provisions under the GST law, as well as the fact that such invoices/debit notes have been uploaded by the suppliers and reflect in the business's GSTR-2B.

Even before 5%, the ITC claim was restricted to 10% between 1st Jan 2020 and 31st Dec 2020 whereas it was 20% for the period from 9th Oct 2019 till 31st Dec 2019.

Background and impact of revised Rule 36(4) on taxpayers from 1st January 2022

Before 9th October 2019, all taxpayers claimed ITC on a self-declaration basis in Table 4(a) of the 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-2B until then, although it was always advised.  

Even if the GSTR-2A (currently with reference to GSTR-2B) reflected an ITC amount lower than the books of accounts, taxpayers could still make their ITC claim in full in the GSTR-3B, and the amount not reflected was treated as provisional credit.

After the implementation of the original Rule 36(4), the provisional ITC amount got restricted to the extent of 5%* of the eligible ITC value already reflected in the GSTR-2B for that period. 

This rule affected the working capital of a taxpayer, as they were required to make GST payments in cash, despite having paid their suppliers for the tax invoice raised by them and having eligible ITC in the books.

At present, with the revised CGST Rule 36(4) being implemented from 1st January 2022, more restrictions have been imposed on buyers. They can only claim amounts of ITC appearing in GSTR-2B without any additional or provisional claims.

The revised rule further negatively impacts the GST registered buyers. It leads to taxpayers’ working capital getting blocked. Buyers must wait for suppliers to upload invoices in the corresponding GSTR-1. Until then, they must pay GST liability in cash.

Taxpayers must hence rigorously follow up with the vendors or suppliers to upload or report their invoices on time. They should adopt business strategies such as holding up vendor payments for the invoice dues or GST value until the supplier complies.

*With effect from 1st Jan 2021 until 31st Dec 2021. However, it was 10% with effect from 1st Jan 2020 up to 31st Dec 2020 and was earlier restricted to 20% for the period from 9th Oct 2019 up to 31st Dec 2019

Example of how tax credit was calculated until 31st Dec 21 and from 1st Jan 22

Let’s decode the original rule on provisional ITC limits and the revised rule 36(4) with an example. Suppose, a taxpayer notices that his vendor has not reported some purchase invoices. The taxpayer is about to claim ITC while filing GSTR-3B.

For ITC reporting in their GSTR-3B, here is how they could claim the input tax credit in his GSTR-3B before and after the implementation of the original rule until 31st December 2021. Also, we have given ITC calculation based on revised rule 36(4) from 1st January 2022.

[**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-2B 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 5% provisional credit applicable till 31st December 2021.] 

Here is an example to understand how eligible ITC will be computed:

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 the original rule in 2019, a taxpayer could claim only Rs.3,000 (Rs.60,000*5%) in his GSTR-3B in any tax period up to 31st December 2021. The balance could have been claimed in a later tax period once the supplier uploaded the pending invoices. But from 1st January 2022, they can claim ‘nil’ provisional ITC. In other words, they cannot claim any amounts as ITC, other than those in GSTR-2B.

How could the taxpayers claim balance ITC?

The balance ITC that was earlier claimed as provisional ITC could have been claimed in the succeeding months once details were actually uploaded by the suppliers. 

Until 31st December 2021, if a supplier uploaded part of the pending invoices in a later period, the taxpayer was able to claim ITC only proportional to up to 5% of these pending invoices uploaded.

From 1st January 2022, since they can claim ITC only if it appears in GSTR-2B and 5% provisional is not available, the process changes. They can claim the balance ITC not appearing in GSTR-2B of one period only in the later tax periods. It is allowed once the supplier reports in their GSTR-1 and it appears in GSTR-2B of such later periods.

Here is an illustration of how provisional ITC was calculated in a later tax period, once pending invoices have been uploaded by suppliers. We have provided both scenarios – As per the original rule 36(4) with 5% provisional ITC and as per revised rule 36(4) without any provisional ITC.

Computation of Provisional ITC on Pending Invoices Uploaded in the later period

The table above displays how taxpayers can claim a lower ITC value today as compared to when provisional ITC was allowed. Compare case I under the original rule with case I under the revised rule to understand the impact – Rs.30,450 then versus Rs.29,000 now. The difference is the 5% provisional ITC earlier allowed every period which is now not available.

Impact and action:

Hence, it is important for buyers to reconcile weekly or more regularly, follow up with vendors constantly to push them for uploading invoices. They must adopt strict terms in holding up vendor payments for non-compliant or less compliant vendors.

^Provisional ITC cannot exceed the total eligible ITC available. As the total eligible ITC available was Rs.1,00,000 and Rs.63,000 had already been claimed in the original period, only the balance of Rs.37,000 could have been claimed in that next period.

Points on provisional credit claims until 31st December 2021

• The restriction on 5% provisional credit was not supplier-wise. It was be linked to the total eligible ITC from all suppliers based on details uploaded in the GSTR-2B.
• The restriction on provisional credit applied to those invoices/debit notes which were supposed to be uploaded by the suppliers and were not uploaded. This means that a taxpayer could 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. If part of the pending invoices of a supplier was uploaded in a later month, the taxpayer had to make sure that provisional credit do not exceed 5% of eligible ITC.
• The provisional ITC availed in a tax period was 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-2B) had to be considered.

For example, if the suppliers uploaded invoices having eligible ITC worth Rs.85,000 in the GSTR-2B, and the total eligible ITC reflected in the books is Rs.1,00,000, then the provisional ITC as per the original Rule 36(4) was Rs.4,250 (Rs.85,000*5%).

Then, the provisional ITC claim would have been capped at Rs.15,000 (Rs.1,00,000-Rs.85,000) as the total ITC claimed could not exceed the total eligible ITC available in a tax period.

What can taxpayers do to mitigate issues arising from the revised rule w.e.f 1st Jan 22?

• A taxpayer should have a full understanding of the invoices appearing in his GSTR-2B – the types of credit available, the extent of ITC reported and the cataloguing of its defaulting/ non-compliant suppliers. This will help him raise accurate ITC claims.
• As the implementation of this rule could impact a company’s working capital, businesses will need to invest additional time in managing their accounts payables more effectively. They can include additional clauses in business contracts to protect their interest, such as holding up vendor payments to the extent of GST amount for delays in invoice uploads.
• It becomes vital for a business to regularly or weekly reconcile their purchase data between their books and the GSTR-2A/2B, identify mismatches and communicate the same to their suppliers so that they upload the missing invoices. Do not wait until the GSTR-3B due date, but follow up more frequently with vendors for timely claims.
• 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. The team at Clear provides a range of solutions such as Clear GST (formerly ClearTax GST) and MaxITC to maximise your ITC claims while filing GSTR-3B.
• Small suppliers who do not use software for keeping track of tax credit claims/claimable will need to be vigilant, and install a mechanism where the same can be effectively monitored. There is no functionality currently available for 100% automated claims on the GSTN, however, it can check where ITC exceeds the GSTR-2B limit and the assessing officer may question and send notices where excess ITC has been claimed!