GST: New Rule Makes Monthly Filings Necessary To Avail Full Input Tax Credit

The government has sprung a retrospective surprise on businesses under the Goods and Services Tax regime. The new rules take away the ability of taxpayers to claim credit for invoices issued for the first nine months of GST implementation—between July 2017 to March 2018. Further, the government has also restricted the ability of businesses to avail input tax credit if their vendors fail to upload their invoices on time.

Input tax credit is the tax paid on inputs. Businesses get a credit for this to deduct from the tax on the output so as to avoid double taxation and pay tax only on the value added.

ITC Availment: Retrospective Surprise

In October last year, the government had clarified that for invoices issued between July 2017 and March 2018, businesses could claim input tax credit up to the last day of filing summary return Form GSTR 3B. That last date for filing claims originally was Oct. 20, 2018 but was later extended to Apr. 23, 2019. Simply put, businesses were allowed to claim input tax credit for invoices issued in the first nine months of GST implementation, up to April 23, 2019.

This clarification, issued via a press release, was challenged before the Gujarat High Court. Broadly, this was on grounds that the section that specifies the time limit to avail input tax credit is linked to Form GSTR 3 and not GSTR 3B. And since the government has not notified GSTR 3 (remains unimplemented) as yet, the time limit to avail input tax credit cannot be capped at April 23, 2019. The high court agreed with this view and allowed taxpayers to file claims for input tax credit up to November 2019 – the due date for filing annual return for FY2017-18.

The high court order was issued in June. Three months later, the government has retrospectively changed the rules of the game.

It has amended the Central GST Rules to say that return filed under GSTR 3B will be considered as the form under the section that specifies the deadline for filing input tax credit claims. Through this, the government has overturned the grounds on which the high court had provided reprieve to taxpayers. This amendment has been introduced retrospectively from July 1, 2017.

Most taxpayers would have availed input tax credit as per the April 23, 2019 deadline but those who didn’t would now see their input tax credit lapse, Jigar Doshi, partner at SKP Business Consulting, told BloombergQuint. The bigger issue is that after the high court ruling, many businesses were hoping to claim residual credits that would surface as they do the exercise of filing their annual returns by November. That opportunity has now been taken away, Doshi explained.

ITC Availment Restrictions

So far, businesses have been claiming input tax credit based on their own invoices. For instance businesss ‘A’ would claim credit for Rs 100 based on its own accounts even though its vendor ‘B’ has uploaded invoices for supply worth Rs 80 only. This would get reconciled at the annual return filing stage – here too businesses were required to disclose only the unmatched credit amount; their ability to avail full credit based on their own accounts wasn’t restricted.

That freedom has now been curtailed.

The amended rules say that input tax credit on unreported invoices should not exceed 20 percent of credit on eligible invoices.

The math is incredibly complex since there are several variables in calculating the available credit, Doshi pointed out. But by way of a simple illustration, this is how it would work.

Assume ‘A’ has purchased inputs with Rs 1,000 in GST paid, that is ‘A’ has Rs 1,000 in input tax credit on its books. Its vendor ‘B’ has uploaded invoices with GST payments of only Rs 700, and Rs 300 worth are unreported invoices. To reiterate, so far, ‘A’ could’ve claimed the full Rs 1,000 as input tax credit and offset it against GST to be paid on the output. But now only 20 percent of eligible credit i.e. Rs 700 can be claimed on the unreported invoices. In this example, ‘A’ would only be able to claim Rs 840 as credit (Rs 700 + Rs 140).

So far, reconciliation of invoices between buyers and their suppliers was an annual exercise—now it would need to be done on a monthly basis, Doshi pointed out. Small businesses aren’t geared for this level of compliance—in which case they would be able to claim much lower input tax credit, hence have to pay more tax, resulting in cash-flow constraints and lost business.

The intent is to shift the compliance burden of vendors on the recipients of the goods and services, Doshi said. If the government maintains this position, then for this month’s filing on Oct. 20, businesses will have to reconcile credits starting April 2019 since the math on how much they can claim, will change.

Watch the full interview with SKP’s Jigar Doshi to understand the complexity of the GST changes...