Understanding Provisional Input Tax Credit and GST Rule 36(4)

The Central Board of Indirect Taxes and Customs (CBIC) introduced an important amendment on October 9, 2019, by inserting sub-rule (4) into Rule 36 of the CGST Rules, 2017. This rule initially governed provisional input tax credit (ITC), allowing taxpayers to claim additional ITC for invoices not appearing in their GSTR-2B, restricted to a certain percentage of the eligible ITC reflected in GSTR-2B.

However, this regulation underwent a significant change with Central Tax notification 40/2021 on December 29, 2021. As a result, from January 1, 2022, taxpayers can only claim ITC if it is reflected in their GSTR-2B. This effectively eliminated provisional ITC claims. The CBIC also issued Circular 123/2019 on November 11, 2019, to clarify issues related to the initial implementation of Rule 36(4).

Note on percentages: The provisional ITC limit was 20% from October 9, 2019, to December 31, 2019. It then changed to 10% from January 1, 2020, to December 31, 2020, and further reduced to 5% from January 1, 2021, to December 31, 2021. Until July 2020, GSTR-2A was the reference form.

Recent Developments

February 1, 2022

Important updates from Budget 2022 include:

• ITC cannot be claimed if it is restricted in GSTR-2B under Section 38.

• The deadline for claiming ITC on invoices or debit notes for a financial year is now the earlier of two dates: November 30 of the following year or the annual return filing date.

• Section 38, pertaining to 'Communication of details of inward supplies and input tax credit,' has been revised to align with Form GSTR-2B. This section outlines the process, timing, conditions, and limitations for ITC claims, moving away from the two-way communication previously used in the suspended GSTR-2. It also mandates providing taxpayers with information on both eligible and ineligible ITC.

• Section 41 has also been updated, removing references to provisional ITC claims and establishing conditions for self-assessed ITC claims.

• Sections 42, 43, and 43A, which previously dealt with provisional ITC claims, matching, and reversal procedures, have been removed.

December 29, 2021

CGST Rule 36(4) was modified, eliminating the provision for an additional 5% ITC beyond what appears in GSTR-2B. Starting January 1, 2022, businesses can only avail ITC if their supplier has reported it in GSTR-1/IFF and it reflects in their GSTR-2B.

December 21, 2021

Effective January 1, 2022, ITC claims are permitted only if they are visible in GSTR-2B. Consequently, taxpayers can no longer claim the 5% provisional ITC under CGST Rule 36(4) and must ensure that every ITC value claimed is accurately reflected in GSTR-2B.

Changes to Rule 36(4): Elimination of Provisional ITC in GSTR-3B

Provisional ITC refers to the input tax credit claimed by buyers for which the corresponding invoice has not yet been reported by their vendors or suppliers to the government. With the revised Rule 36(4), effective January 1, 2022, provisional ITC claims have been discontinued. This change aligns with the introduction of new clause (aa) under Section 16(2) of the CGST Act.

Previously, sub-rule (4) of Rule 36 of the Central Goods and Service Tax Rules allowed taxpayers filing GSTR-3B to claim input tax credit up to the extent of eligible credit appearing in GSTR-2B, plus a provisional amount. Until December 31, 2021, this provisional claim permitted an additional 5% (making it 105%) of the ITC available in GSTR-2B/GSTR-2A for the period from January 1, 2021, to December 31, 2021.

The eligible credit amount is determined based on GST law provisions for input tax credit, along with the crucial requirement that suppliers have uploaded such invoices/debit notes, which must then appear in the recipient's GSTR-2B.

Before the 5% limit, the ITC claim was restricted to 10% between January 1, 2020, and December 31, 2020, and was initially capped at 20% from October 9, 2019, until December 31, 2019.

Context and Impact of Revised Rule 36(4) on Taxpayers from January 1, 2022

Prior to October 9, 2019, taxpayers declared ITC on a self-assessment basis in Table 4(a) of GSTR-3B, providing a summary of eligible IGST, CGST, and SGST credits. Reconciliation of ITC figures with GSTR-2B was not mandatory, though recommended. Even if GSTR-2A (or GSTR-2B, later) showed a lower ITC than recorded in accounting books, taxpayers could still claim the full ITC in GSTR-3B, with the unreflected amount treated as provisional credit.

Upon the initial implementation of Rule 36(4), the provisional ITC was limited to 5% of the eligible ITC value already present in GSTR-2B for that period. This rule impacted taxpayer working capital, necessitating cash GST payments even when suppliers had been paid for tax invoices and eligible ITC existed in the books.

Currently, with the revised CGST Rule 36(4) in effect from January 1, 2022, further restrictions apply to buyers. They can now only claim ITC amounts that explicitly appear in GSTR-2B, without any allowance for additional or provisional claims.

This revised rule negatively affects GST-registered buyers by potentially blocking their working capital. Buyers must now wait for suppliers to upload invoices into GSTR-1, and until then, they are required to pay their GST liability in cash.

Consequently, taxpayers must diligently follow up with their vendors or suppliers to ensure timely invoice uploads and reporting. Businesses may need to implement strategies, such as withholding vendor payments for invoice or GST amounts until suppliers comply with reporting requirements.

Illustrative Tax Credit Calculation: Before and After January 1, 2022

To understand the difference between the original provisional ITC limits and the revised Rule 36(4), consider an example where a taxpayer discovers that a vendor has not reported certain purchase invoices while preparing to claim ITC in GSTR-3B.

Here’s how input tax credit could be claimed in GSTR-3B:

Note: Eligible ITC pertains to business activities like purchases, services, and capital assets, which can offset GST liabilities. GSTR-2B might include ineligible ITC (e.g., for food, club memberships, personal expenses) or mistakenly reflected ITC due to incorrect GSTINs. Therefore, only eligible ITC is considered when calculating the 5% provisional credit limit applicable until December 31, 2021.

Below is an example illustrating the computation of eligible ITC:

Table 1: Computation of Eligible ITC as per Books of Accounts

Table 2: Computation of Eligible ITC as per GSTR-2B

The total ITC difference (between books and GSTR-2B) not reflected in GSTR-2B for the tax period is 45,000 (1,20,000 - 75,000). The eligible ITC difference not reflected is 40,000 (1,00,000 - 60,000).

Under previous regulations, the taxpayer could have claimed the full Rs.40,000 (Rs.1,00,000 – Rs.60,000) as provisional credit. Following the enforcement of the original rule in 2019, a taxpayer could claim only Rs.3,000 (Rs.60,000*5%) in GSTR-3B for any tax period up to December 31, 2021. The remaining balance could be claimed in a subsequent tax period once the supplier uploaded the pending invoices. However, from January 1, 2022, no provisional ITC can be claimed, meaning taxpayers can only claim ITC amounts that are already reflected in GSTR-2B.

Process for Claiming Balance ITC

Any balance ITC that was previously allowed as provisional ITC could be claimed in subsequent months once suppliers uploaded the relevant details.

Until December 31, 2021, if a supplier partially uploaded pending invoices in a later period, the taxpayer could claim ITC proportionally, up to 5% of these newly uploaded pending invoices.

Since January 1, 2022, ITC can only be claimed if it appears in GSTR-2B, and the 5% provisional allowance is no longer available. This changes the process: the balance ITC not appearing in GSTR-2B for one period can only be claimed in later tax periods, specifically once the supplier reports it in their GSTR-1 and it subsequently appears in the recipient's GSTR-2B for those later periods.

Here is an illustration of how provisional ITC was calculated in a later tax period after pending invoices were uploaded by suppliers, showing scenarios both with and without provisional ITC:

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

The table demonstrates that taxpayers claim a lower ITC value now compared to when provisional ITC was permitted. Comparing Case I under the original rule with Case I under the revised rule, the amount is Rs.30,450 then versus Rs.29,000 now. This difference reflects the 5% provisional ITC previously allowed in each period, which is no longer available.

Implications and Recommended Actions:

Therefore, it is crucial for buyers to perform weekly or more frequent reconciliations and consistently follow up with vendors to prompt them to upload invoices. Implementing strict terms for vendor payments, such as withholding GST amounts for non-compliant or delayed invoice uploads, is advisable.

Note: Provisional ITC could not exceed the total eligible ITC available. For instance, if total eligible ITC was Rs.1,00,000 and Rs.63,000 had already been claimed, only the remaining Rs.37,000 could be claimed in the subsequent period.

Key Aspects of Provisional Credit Claims Until December 31, 2021

• The 5% provisional credit restriction was not specific to individual suppliers; it was linked to the total eligible ITC from all suppliers based on details uploaded in GSTR-2B.
• This provisional credit restriction applied to invoices/debit notes that were supposed to be uploaded by suppliers but were missing. Taxpayers could still claim full ITC for IGST paid on imports, credit from an Input Service Distributor (ISD), credit from documents under the reverse charge mechanism, and other similar credits. If a supplier later uploaded some pending invoices, the taxpayer had to ensure that the provisional credit did not exceed 5% of the eligible ITC.
• The provisional ITC availed in a tax period was capped to ensure that the total ITC claimed did not surpass the total eligible ITC. This meant considering the lower of the provisional ITC or the difference in eligible ITC (between accounting records and GSTR-2B).

For example, if suppliers uploaded invoices with eligible ITC worth Rs.85,000 in GSTR-2B, and the total eligible ITC in the books was Rs.1,00,000, then the provisional ITC as per the original Rule 36(4) would have been Rs.4,250 (Rs.85,000*5%). However, the provisional ITC claim would have been limited to Rs.15,000 (Rs.1,00,000 - Rs.85,000), as the total ITC claimed could not exceed the available eligible ITC in a tax period.

Mitigating Challenges Arising from the Revised Rule (Effective January 1, 2022)

To address issues stemming from the revised rule, taxpayers can take several steps:

• Understand GSTR-2B Invoices: Taxpayers should thoroughly understand the invoices reflected in their GSTR-2B, including the types of credit available, the reported ITC extent, and identify any defaulting or non-compliant suppliers. This knowledge is crucial for accurate ITC claims.
• Effective Accounts Payable Management: As this rule can affect a company’s working capital, businesses must allocate more time to manage their accounts payables efficiently. Incorporating clauses in business contracts to safeguard interests, such as delaying vendor payments by the GST amount for late invoice uploads, can be beneficial.
• Regular Reconciliation: It is vital for businesses to reconcile their purchase data between their books and GSTR-2A/2B regularly, ideally weekly. This helps identify mismatches and enables prompt communication with suppliers to upload missing invoices. Taxpayers should not wait until the GSTR-3B due date but actively follow up with vendors for timely claims.
• Automated Invoice Tracking: Implementing an automated system for invoice tracking, ideally with a built-in communication link to vendors/suppliers, can save significant effort, time, and money in the long run.
• Supplier Vigilance: Small suppliers who do not use software for managing tax credit claims will need to remain vigilant and establish a system for effective monitoring. While the GSTN currently lacks functionality for 100% automated claims, it can identify instances where ITC exceeds the GSTR-2B limit, potentially leading to questions or notices from assessing officers regarding excess ITC claims.