Major litigations pending at courts are either due to non-backing of provisions to the rules (which are made at bureaucrat’s choice) or due to favourable decisions in other cases to the taxpayers, with the clue of which taxpayers seek relaxation. Budget proved to be a golden chance for the government to turn down all such unfavourable decisions against them to favourable ones, especially related to ITC (Input Tax Credit).
We all have already gone through various analysis of budget proposals related to GST but the highlight and most impacted subject which will involve a substantial stake of money is ITC, due to Budget 2022 and its impact is focus area of this article.
For simplicity we will divide our article in three parts :
1. GST 1.0 – ITC with four conditions.
2. GST 2.0 – ITC with five conditions.
3. GST 3.0 – ITC with eleven conditions.
1. GST 1.0 – ITC with four conditions
As we are aware that four conditions as envisaged in Section 16(2) of CGST Act, 2017 was the base for availing ITC to the recipient. The same were :
– Possession of a tax invoice/debit note.
– Receipt of goods.
– Payment of tax by supplier.
– Furnishing of return by recipient.
Said conditions were only to be ensured till 31/12/2021.
2. GST 2.0 – ITC with five conditions
W.e.f. 01/01/2022; by notifying Section 16 (2) (aa) of CGST Act, 2017 an additional condition was imposed on the recipient to ensure that all ITC which he intends to claim has been shown by his supplier in his GSTR-1 and that too timely, failure of which ITC claim will be disregarded for the specific tax period. Thereby GSTR-2B tool came into play for such reconciliation.
3. GST 3.0 – ITC with eleven conditions
With Budget 2022, Section 16 (2) (ba) of CGST Act, 2017 has been inserted whereby six new conditions has been imposed for availing ITC which has been prescribed u/s 38(2) of CGST Act, 2017. In other words, ITC would be allowed to be availed only if the same has not been restricted u/s 38 (2) of CGST Act, 2017 in addition to above discussed five conditions.
Hence generally ITC needs to pass three-tier restriction test before certifying itself as eligible ITC :
i. Conditions under Section 16 (2).
ii. Blocked credits under Section 17 (5).
iii. Conditions under Section 38 (2).
P.S. In case of taxpayers having exempt turnover, non-business activities, etc. additional restrictions are also imposed.
Time to delve into six new conditions imposed under Section 38 (2) :
a. Newly registered person
Condition: ITC received from newly registered person within a specified period of taking registration (to be prescribed) will not be allowed to be availed.
Impact: This will turn out to be nightmare for start-ups dreaming to ‘Make-in-India’ as non-allowance of their supplies as ITC to their customers will result in a non-level playing field against competitors. Who would risk their ITC by promoting newly registered taxpayer where already their ITC are at the fate of GSTR-2B’ There are already enough measures and penal consequences to ensure that new registered taxpayer comply with registration requirements in time. Adding such a draconian blanket cap on all newly registered taxpayers will surely demotivate them.
b. Default in payment of tax by registered person
Condition: Registered person has continuously defaulted in payment of tax for such period (to be prescribed).
Impact: On one side, the government already disallows ITC of the recipient when the supplier has not paid his tax u/s 16 (2) (c) of CGST Act, 2017. Now the government is also eyeing to restrict the ITC of supplier when he defaults to pay tax. Genuine hardships are not considered when the supplier intends to pay tax belated that too with interest. Hence just consider a situation a supplier has to be in whereby he continues in defaulting payment of tax as under :
– He needs to pay interest @ 18% on his belated tax liability.
– He cannot claim his ITC.
– Recipient would not pay him tax amount as he has defaulted in payment of tax liability thereby additional cost to supplier.
– If recipient has wrongly availed such credit which is bound to be reversed with interest, such interest would also be recovered from the supplier.
This would result in total disruption of business who is indeed a taxpayer, nation’s partner in growth.
c. Registered person’s output tax liability in GSTR-1 exceeds output tax liability shown in GSTR-3B by a certain limit
Condition: If the tax liability admitted by a supplier in his GSTR-1 exceeds against the tax liability shown in GSTR-3B by a certain limit (to be prescribed).
Impact: It’s simply unobvious how can such a restriction be considered for every tax period especially when the government itself allows for rectification of GSTR-1 and GSTR-3B by adjusting amounts in subsequent tax periods. Annual tallying should be the approach, if any. Also, a prudent understanding of any law teaches us that failure in one area cannot restrict the other area, meaning thereby failure in output tax liability should be compensated with output tax liability penal consequences only i.e. interest and penal consequences on output tax liability, non-allowance of ITC to its customers, etc. How can ITC of suppliers be disturbed because of its output tax liability mismatch’ This is nothing but double taxation benefit to revenue.
d. Registered person has availed ITC exceeding a limit prescribed
Condition: GSTR-2B is proposed to reflect ITC which can be claimed by the supplier and which cannot be claimed (to be prescribed), irrespective of bonafide or fake supplies.
Impact: As such ITC reflecting in GSTR-2B was not enough to be allowed, even testing each credit in GSTR-2B as eligible and non-eligible is the plan forward. Here government has vast scope in restricting ITC of blacklisted suppliers, industry-specific supplies which are blocked and lot more. Registered taxpayers need to make a peace with the thought for a certain percentage of ITC to be booked as business expenditure in long-run. Full ITC claim looks good as a dream now!
e. Registered person has defaulted in discharging tax liability u/s 49(12)
Condition: Registered person (to be prescribed) cannot utilize ITC available in his Electronic Credit Ledger above the limit prescribed u/s 49 (12) of CGST Act, 2017.
Impact: Rule 86B as of now restricts ITC utilization of maximum 99% while payment of tax (to specified taxpayers). Such rule had no legal backing of provision which is now provided for. Hence government has now free hand in restricting utilization of even eligible ITC for payment of tax. Hence eligible ITC can also be restricted for utilization, though availed.
f. Such other class of persons
Condition: Government may also prescribe class of persons to whom ITC cannot be allowed.
Impact: As if above conditions were not enough, Government retains a veto power to block certain class of persons from availment of ITC. Such a blanket restriction would lie in the law books as ‘to be prescribed’ only for long time unless the situation warrants.
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Mr. Sathya Narayan a Practicing Tax Professional with experience of 15+ years in corporates. He is the founder of Tax Pro Solutions a start-up firm incorporated in Chennai. He can be reached at taxpro335@gmail.com
