How to Calculate 5% Provisional ITC in FORM GSTR-3B as per the CGST Rule 36(4)
Budget 2021 update :Section 16 amended to allow taxpayers’ claim of the input tax credit based on GSTR-2A and GSTR-2B. Henceforth, the input tax credit on invoice or debit note may be availed only when the details of such invoice or debit note have been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note.
The CBIC released an important notification on 9 October 2019, inserting sub-rule (4) under rule 36 of the CGST Rules, 2017. The rule states that the provisional tax credit (without invoices on GSTR-2B**) can be claimed in the GSTR-3B to the extent of 5%* of eligible ITC reflected in the GSTR-2B**. Hence, the total ITC that can be claimed in GSTR-3B is 105% of the eligible ITC appearing in the GSTR-2B** of a particular period.*With effect from 1 Jan 2021. However, it was 10% with effect from 1 Jan 2020 upto 31 Dec 2020 and was earlier restricted to 20% for the period from 9 Oct 2019 up to 31 Dec 2019**Was GSTR-2A up to July 2020A circular clarifying the issues relating to the implementation of original rule 36(4) was released on 11 November 2019.
The CBIC has revised the extent of provisional input tax credit claims from 10% to 5%, with effect from 1 Jan 2021.
Update as on 3rd April 2020
The CBIC had notified that taxpayers can claim input tax credit in the GSTR-3B return from February 2020 to August 2020, without applying the rule of capping provisional ITC claims at 10% of the eligible ITC as per GSTR-2A (currently with refererence to GSTR-2B).To give an instance, while filing the GSTR-3B of September 2020, the taxpayers must cumulatively adjust ITC as per the above rule from February 2020.
Update as on 1 Jan 2020
The CBIC has revised the extent of provisional input tax credit claims from 20% to 10%.
Update as on 9 October 2019
The CBIC has notified that the input tax credit that can be availed by a registered person in respect of invoices or debit notes, will be restricted to 20% of of the eligible credit available in respect of invoices or debit notes as per details uploaded by the suppliers.
1. What is rule 36 (4) on provisional ITC in Form GSTR-3B?
As per the 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 5% of the eligible credit available in GSTR-2A. The amount of eligible credit is arrived upon those invoices or debit notes, the details of which have been uploaded by the suppliers in the GSTR-2A only. The new percentage applies from 1 Jan 2021 onwards. The ITC claim was earlier restricted to 10% between 1 Jan 2020 and 31 Dec 2020 whereas it was 20% for the period from 9 Oct 2019 till 31 Dec 2019.(The notification no. 49/2019- Central Tax dated 9 October 2019 added the 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 did the 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 then, although it was always advised. Even if the GSTR-2A (currently with refererence 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 unreflected amount was treated as provisional credit.After the implementation of this rule, the provisional ITC amount is restricted only to the extent of 5%* of the eligible ITC value already reflected in the GSTR-2A for that period. Apart from the 10%* of eligible ITC which a taxpayer can claim as provisional credit, the balance tax liability will need to be paid in cash.This 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.*With effect from 1 Jan 2021. However, it was 10% with effect from 1 Jan 2020 upto 31 Dec 2020 and was earlier restricted to 20% for the period from 9 Oct 2019 up to 31 Dec 2019
3. Example of how provisional credit will be calculated
Let’s decode the rule on provisional ITC limit with an example. If a taxpayer is filing his GSTR-3B for the month of January 2021, here is how he would claim the input tax credit in his GSTR-3B before and after the implementation of the rule.
(Amount in Rs)
Eligible ITC** available in the Purchase register
Eligible ITC** available in the GSTR-2B
ITC that can be claimed as the provisional credit
Total ITC that can be claimed in the GSTR-3B
ITC not allowed in the GSTR-3B of January 2021
[**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.]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
ITC appearing in the books for Jan 2021
ITC relating to business purchases for Jan 2021 (eligible ITC)
Ineligible ITC reflecting in books in Jan 2021
Total eligible ITC that can be claimed as per books for Jan 2021
Table 2: Computation of Eligible ITC as per GSTR-2B
ITC appearing in the GSTR-2B for Jan 2021
ITC relating to business purchases for Jan 2021 (eligible ITC)
Ineligible ITC reflecting in the GSTR-2B in Jan 2021
Total eligible ITC that can be claimed as per GSTR-2B for Jan 2021
A (Table 1) – A (Table 2)
Total ITC difference (between the books and the GSTR-2B) not reflecting in the GSTR-2B for Jan 2021
D (Table 1) – D (Table 2)
Eligible ITC difference (between the books and the GSTR-2B) not reflecting in the GSTR-2B for Jan 2021
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.3,000 (Rs.60,000*5%) in his GSTR-3B of January 2021. 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 5% 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 January 2020
Provisional ITC claimed (as per example given above)
Provisional ITC remaining to be claimed (as per the example above)
Eligible ITC uploaded by suppliers in the month of Feb 2021
Provisional ITC which can be claimed for the month of Feb 2021
Total ITC that can be claimed in Feb 2021 (ITC reported by suppliers + provisional ITC)
Balance eligible ITC still not allowed in Feb 2021
^Provisional ITC cannot exceed the total eligible ITC available. As the total eligible ITC available is Rs.1,00,000 and Rs.63,000 had already been claimed in the month of Jan 2021, only the balance Rs.37,000 can be claimed now.
5. Important points to note while claiming provisional credit
1. The restriction on 5% 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-2B.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. If part of the pending invoices of a supplier is uploaded in a later month, the taxpayer must make sure that provisional credit does not exceed 5% of eligible ITC.4. 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-2B) will be considered.For Ex: If the suppliers have 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 will amount to Rs.4,250 (Rs.85,000*5%). 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-2B – 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 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 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. 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 5% 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/2B 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-2B 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.