Exclusive: Latest GST circular puts an end to confusion over new input tax credit rules

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Updated: November 11, 2019 7:47:11 PM

CBIC's latest GST circular clears air over several key issues such as how to calculate 20% amount over and above the eligible amount of ITC, cut-off dates and where the new rule will not be applicable.

GST, CBIC, Input Tax Credit, GST latest circular, GST news,CBIC’s new circular clarifies confusion about 20% cap on ITC claims.

GST News: In a big relief for GST taxpayers, the Union government on Monday clarified the new rules related to availing input tax credit under the GST. It said that a certain category of Input Tax Credit claims such as ITC in respect of the IGST paid on imports and GST paid under the reverse charge mechanism have been kept out of the scope of the new rules introduced last month. The new rules implemented by the CBIC limited input tax credit claims to 20% of the eligible amount where invoice matching has been done. However, the notification issued by the CBIC on October 9 caused a lot of confusion over the method of calculating this 20% amount, the cut-off date and also whether it was to be calculated supplier-wise or on a consolidated basis. These concerns prompted the CBIC’s GST policy wing to issue a new circular today clarifying all these aspects.

“This circular clarifies a few points and will be of help to GST payers,” said Pritam Mahure, a Pune based chartered accountant.

The circular issued by the Central Board of Indirect Taxes (CBIC) also clarified that this 20% cap on the eligible Input Tax Credit will not be calculated supplier-wise and GST payers can avail the input tax credit on a consolidated basis.

The Modi government had received complaints that some businesses were availing input tax credit by using fake GST invoices. In order to check the problem of misuse of input tax credit system, the CBEC, the nodal body to implement indirect taxes in the country, had last month made it compulsory to match the invoices uploaded by the suppliers in their GSTR1 forms before buyers can avail Input Tax Credit in their GSTR-3 returns. However, it also allowed the buyers to claim 20% more input tax credit over and above the eligible amount where invoice matching was done but the lack of clarity over the method of calculation created confusion among GST payers.

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The CBIC’s latest circular is intended at clarifying all these aspects. For example, if a buyer is entitled to avail input tax credit of Rs 10 lakh on inward supplies (purchases) in a month but if his suppliers have only uploaded the correct invoices in respect of supplies of Rs 6 lakh only in the GSTR1 forms uploaded by them, then the buyer can avail ITC of Rs 6 lakh plus 20% of the eligible amount that is Rs 1.2 lakh. Therefore the buyer could claim a total ITC of Rs 7.2 lakh in the month.

It also clarified that the total amount of ITC, even after the addition of 20% input tax credit over and above the eligible amount where invoice matching has been done, cannot exceed the total amount of input tax credit that can be claimed.

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For example, if a buyer is entitled to ITC of Rs 10 lakh on inward supplies and invoice matching is done in case of Rs 9 lakh then as per the 20% cap rule, he is also entitled to avail 20% over and above the eligible amount of Rs 9 lakh, which is 1.8 lakh in this case. However, this can take the total amount of ITC to be availed by him in the month to Rs 10.8 lakh, Rs 80,000 more than the total ITC amount that can be claimed. The new circular has clarified that in any case ITC claims will be restricted to the total amount due.

For example, if a buyer is entitled to ITC of Rs 10 lakh on inward supplies and invoice matching is done in case of Rs 9 lakh then as per the 20% cap rule, he is also entitled to avail 20% over and above the eligible amount of Rs 9 lakh, which is 1.8 lakh in this case. However, this can take the total amount of ITC to be availed by him in the month to Rs 10.8 lakh, Rs 80,000 more than the total ITC amount that can be claimed. The new circular has clarified that in any case ITC claims will be restricted to the total amount due.

GST, Input Tax Credit, Latest Circular, GST Latest NewsLatest GST circular also clarified cut-off dates for calculating ITC.

The latest GST circular also clarified three distinct cases where the newly introduced rule to cap ITC to 20% over and above the eligible amount will not be applicable.

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Where new GST Input Tax Credit rule will not be applicable

The cap of 20% on availing input tax credit under the GST rule 36, sub-rule (4) introduced on October 9 will not be applicable on three cases:

1. ITC in respect of the IGST paid on imports and these importers can directly avail the input tax credit;

2. The cap of 20% will also not apply to those cases where GST has been paid under the Reverse Charge Mechanism (RCM) and;

3. The ceiling of 20% on availing ITC will also not apply on Input Service Distributors (ISD), these are those businesses that receive invoices on behalf of the services used by their branches and subordinate offices.

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