It is unclear whether the 20% clause shall be applied monthly or quarterly or annually.
- Rajat Mohan
Recently, the government has unveiled a few notifications under GST law, one of which imposes a new restriction on the input tax credit by limiting it to 120% of the eligible input tax credit loaded on the online system of GSTN(“20% Rule”). This new embargo has been made applicable from October 2019 and would have a far-reaching impact on the overall compliance framework of the indirect taxes in the country. In this article, we would analyse the practical and legal difficulties that the taxpayer is expected to face in this restraint.
20% Rule states that input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers on GSTN, shall not exceed 20 percent of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers on GSTN.
Tax period covered is not specified:
By virtue of GST laws, a supplier can upload or amend the invoices for the financial year up to due date of filing of return of September to which such details pertain. Thus, what would be the implication if there is a delay by the supplier for filing the tax returns. It is unclear whether the 20% clause shall be applied monthly or quarterly or annually? Hence, the levy of interest and penalties is a debatable issue.
Mr. A issues a tax invoice to Mr. B in Oct 2019. Mr. B claims ITC of the same in Oct 2019. Mr. A uploads it in Sep 2020 return (invoice date of Oct 2019). Now the concern is whether the taxpayer would have to reverse the tax credit in October 2019 or March 2020 and that too with interest?
Non-clarity on implementation date:
Legally speaking, 20% Rule is effective from Oct 9, 2019. Now the question arises, does the taxpayer has to consider this clause for Sep 2019 return as well or it has to be from Oct 2019 return. Eligibility of tax credit is to be seen at the time of receipt of supplies and not at any period thereafter. Eligibility needs to assessed strictly accordingly to the law in place as on the date of procurement/ recording of such procurement in books. This new law was inexistent on 30 September 2019, thereby this condition should not be applied to returns for the period till 30 September 2019. However, a clarification from the government would help troubleshoot the confusion in the minds of tax officers and taxpayers.
Dual hardship on the taxpayer:
No clarity has been provided with respect to exclusion of reversal made as per Rule 42 & 43(These rules relate to proportionate common input tax credit reversal in select cases). This may lead to dual hardship on the taxpayer by way of double reversal as there have been no subsequent changes in both the tax rules.
Impact of subsequent amendments made by the vendor:
There would be numerous cases where amendments are made by the supplier in the invoice in subsequent months but the recipient had already availed input tax credit on the basis of original details. This will create a mismatch as per GSTR-2A and actual credit availed by the recipient.
In such cases, matching of the input tax credit would be a never-ending task and has to be undertaken on a monthly basis. This would make compliance an impossible task.
Implications of future credit disallowances:
In case of scrutiny in later years if it is found that a portion of the claimed tax credit was ineligible, then the department will ask to reverse the ineligible portion. Thereby, the amount of reversal required to be made as per department will be ineligible credit and accordingly, this newly inserted rule would be re-checked on only for eligible tax credit portion. This may result in additional tax reversal on account of this 20% rule and liability of interest thereon. We believe this would lead to legal debacle between taxpayer and tax officers.
With the introduction of GST, the onus of tax compliance for vendors was shifted to the recipient. The government has moved one step ahead and mandated the periodic reconciliation to be prepared by the recipient. Keeping in view complications in this new 20% rule and the ambiguity in the law, in order to avoid departmental harassment at lower levels, taxpayers are suggested to reconcile the GSTR-2 v/s 2A on a quarterly basis and do regular follow-ups with vendors forcing them to upload the invoices in GSTR-1. Non-compliant vendors will impact the working capital and profitability of recipients.
With the heightening of restriction and cavets on the claim of tax credits, it is expected that claiming Tax Credit would both be risky as well as a costly affair. In such circumstances, taxpayers may plead government to exit the scheme of the tax credit in total like they did it in fooding industry and real estate industry so as to artificially ring-fence the tax rates. Although such demand would push the Indian indirect system back to the Sales tax era of the 1990s.
Rajat Mohan is Senior Partner at AMRG & Associates. Views expressed are the author’s personal.