Challenges in Input Tax Credit due to Notification No. 94/2020

CBIC has rolled out a new notification recently & it has taken the taxpayers by surprise. As per the new Notification No. 94/2020, there are many amendments made to various rules relating to the ITC or Input Tax Credit.

These rules are strict & firm and can thus create problems & challenges for the taxpayers.

In this article we have explained the changes made to the specific rules & their impact one by one.

Read the Article till the end.

There is a total of three changes made to Input Tax Credit via this Notification.

Addition of clause to Rule 21- ‘Cancellation of Registration’

There has been an addition of clauses to Rule 21 Cancelation of Registration, namely 21(e); 21(f) & 21(g)

Here is a verbatim of the Rule-

“(e) avails input tax credit in violation of the provisions of section 16 of the Act or the rules made thereunder; or

(f) furnishes the details of outward supplies in FORM GSTR-1 under section 37 for one or more tax periods which is in excess of the outward supplies declared by him in his valid return under section 39 for the said tax periods; or

(g) violates the provision of rule 86B.”

Let us explain what each clause means-

1. Taxpayer’s GST Registration can be canceled if they violate Section 16 and avail more than eligible ITC.
2. Taxpayer’s GST Registration can be canceled if they declare excess of the outward supplies in their GSTR-1 for one or more tax periods
3. Taxpayer’s GST Registration can be canceled if you violate the new Rule-86B (Which is explained below)

Note- the Government can cancel taxpayer’s GST registration without giving him an opportunity to be heard.

Note- However such assesses can represent themselves in the court and request for revoking suspension.

Amendment of Rule 36(4)

Rule 36(4) has been amended and it is not in the favor of the recipient party of the goods.

Earlier, for any invoices missing in the supplier’s GSTR-1 & thus in the recipient’s GSTR-2A, the recipient was allowed to claim up to 10% of the eligible ITC.

Lets take an example for the same-

Supplier is a Quarterly Filer & thus has not filed & furnished GSTR-1 for November 2020. Now their recipients cannot claim the ITC of November due to missing invoices.

But they can claim 10% of the eligible ITC in November 2020.

Then again when their suppliers file their GSTR-1 in December 2020, then the supplier can claim the balance amount.

The change in this Rule is that the government has decreased the Provisional ITC percentage from 10% to 5%. So now, taxpayers can only claim 5% of the eligible ITC in case Invoices are missing due to any reasons.

This is an issue for the taxpayer, however the introduction of GSTR-2B may help taxpayers in this context.

GSTR-2B is the auto-populated ITC summary which remains constant for a tax period even if the supplier makes changes to their GSTR-1.

So if a supplier declares his outward supplies in the next tax period they will automatically auto-populate in the recipient’s GSTR-2B making it simpler for them to understand which is the ITC from the previous month& which is the fresh ITC.      

Insertion of New  Rule 86B

Here is the verbatim of The New Rule- 86B that has been inserted by CBIC-

“86B. Restrictions on use of amount available in electronic credit ledger.-Notwithstanding anything contained in these rules, the registered person shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of ninety-nine per cent. of such tax liability, in cases where the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees”

This means that Rule 86B will implement from January 1st 2021 wherein restriction has been placed on setting off of more than 99% of tax liability from Input tax credit where the value of taxable supplies other than exempt supply and zero rated supply exceeds INR 50 Lakhs in a month.

In other words taxpayers have to release at least 1% of the tax liability using the electronic cash ledger, even if they have sufficient balance in their electronic credit ledger.

The above Rule is subject to the following provisions:

“Provided that the said restriction shall not apply where –

(a) the said person or the proprietor or karta or the managing director or any of its two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees, as the case may be, have paid more than one lakh rupees as income tax under the Income-tax Act, 1961(43 of 1961) in each of the last two financial years for which the time limit to file return of income under subsection (1) of section 139 of the said Act has expired; or

(b) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilized input tax credit under clause (i) of first proviso of sub-section (3) of section 54; or

(c) the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilized input tax credit under clause (ii) of first proviso of sub-section (3) of section 54; or

(d) the registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability, applied cumulatively, up to the said month in the current financial year; or

(e) the registered person is –

(i) Government Department; or

(ii) a Public Sector Undertaking; or

(iii)a local authority ; or

(iv) a statutory body:

Provided further that the Commissioner or an officer authorized by him in this behalf may remove the said restriction after such verifications and such safeguards as he may deem fit.”

Conclusion

So, Input Tax Credit under GST is not as easy as it seems, & requires precision & knowledge. Although manual errors are always present and are quite common.

To this, you can take help from artificial intelligence such as applications. GSTHero is a government authorized Application & GST Suvidha Provider.

GSTHero can immensely help you in claiming, calculating & precisely managing your input tax credits as well as provisional credits. It's smart build-up & automated features will reduce compliance burden, time & effort consumption, leaving you stress-free & your compliance accurate.

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