Understanding Discrepancies in GST Input Tax Credit Rules

Claiming Input Tax Credit (ITC) under the Goods and Services Tax (GST) framework allows businesses to reduce their tax liability by recovering GST paid on inputs used for business operations. This mechanism is available to various registered entities, including manufacturers, agents, suppliers, and e-commerce operators. To successfully claim ITC, a registered person must possess a valid tax invoice and confirm receipt of the goods or services listed. Additional conditions stipulated by the GST Act must also be met.

Deciphering Section 16(2)(c)

Section 16(2)(c) of the CGST Act, 2017, permits a buyer to claim ITC on purchases, contingent upon the supplier remitting the GST for that specific supply. Suppliers are required to settle this tax either through cash payments or by utilizing their allowable ITC. Suppliers must upload their Business-to-Business (B2B) supply details onto the common GST portal via GSTR-1. This process enables buyers to verify if their supplier has properly recorded and uploaded the transaction. If a seller fails to upload the transaction to the GST portal, the buyer is generally prohibited from claiming ITC on that particular transaction. Essentially, Section 16(2)(c) prevents buyers from availing ITC unless the supplier has duly paid the tax on the supplied goods or services, either in cash or through eligible ITC.

Comprehensive Overview of Rule 36(4) for Input Tax Credit

Prior to October 9, 2019, taxpayers could claim ITC simply by self-declaring it in GSTR-3B, without the necessity of reconciling it with GSTR-2B. Even if the ITC amount in GSTR-2A was less than what was recorded in the assessee’s accounting books, provisional credit could still be claimed for amounts not yet reflected in GSTR-2B.

An amendment to Section 16, introduced last year, stipulated that buyers could only claim ITC on invoices or debit notes after their suppliers had furnished these details in their outward supply statements and communicated them to the buyer. Until recently, if a supplier uploaded some invoices later, the buyer could still claim up to 5% of the ITC for these pending invoices.

However, since January 2022, the provision for claiming ITC on a provisional basis has been abolished, following the revised Rule 36(4). Currently, ITC can only be claimed when the supplier submits the relevant invoices or debit notes in their GSTR-1, and these are subsequently reflected in GSTR-2B.

Consequently, buyers must now establish stringent contractual agreements with their suppliers to mitigate potential losses arising from supplier failures to upload invoices. This scenario necessitates robust vendor management, an efficient compliance system, appropriate contractual safeguards, and rigorous measures for recovering funds paid to suppliers.

The Discrepancy Between Section 16(2)(c) and CGST Act Rule 36(4)

The inconsistency between Section 16(2)(c) and Rule 36(4) presents challenges for buyers attempting to claim ITC. A buyer adhering to Section 16(2)(c) who refrains from claiming ITC because their supplier has not yet paid the tax on a supply can only claim that ITC in a subsequent month once the supplier settles the tax. Conversely, Rule 36(4) mandates that buyers can only claim ITC as it appears in GSTR-2B. GSTR-2B displays outward supply details uploaded by the supplier between two specific due dates for either the Invoice Furnishing Facility or Form GSTR-1. As a result, the GSTR-2B for the following month will not include data from the previous month that a supplier might have uploaded late. This effectively denies the buyer ITC that they deliberately did not claim due to the supplier's initial non-payment of tax.

Conclusion

While the government's initiatives aim to curb the practice of claiming ITC through fraudulent invoices, placing the burden on buyers to verify supplier tax payments without adequate facilities appears unjust. This situation creates undue difficulties for legitimate buyers who have paid their tax share to sellers and possess all valid documentation required for ITC claims.