Seamless flow of credit. Myth or Reality?
In July 2017, GST was rolled out with a robust return filing system which would have resulted in a seamless flow of credit. Government has time and again introduced various new forms & scrapped the old forms in order to address the technical glitches, the preparedness of the GST portal, and hardships faced by the taxpayers. Numerous amendments, substitutions, and omissions to GST Law & GST Rules have been made by way of a notification, orders, and circulars. Any such change in Act or Rules would have multiple effects that need to be taken proper care otherwise it results in an anomaly.
Is the government intending to scrap Form GSTR 2A?
Section 16(2) (aa) of CGST Act 2017
- Clause (aa) after clause (a) in section 16(2) was introduced by Finance Act 2021 and will be effective from 1st January 2022 prospectively.
- It was notified vide CGST Notification no. 39 dated 21st December 2021.
- The same will be made effective from 1st January 2022
- Rule 36(4) of CGST Rules 2017 is amended to waive the 5% cushion while availing ITC vide CGST Notification no. 40 dated 29th December 2021 and will be effective from 1st January 2022 prospectively.
“(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;”
What is the eligibility criteria & conditions to avail of the input tax credit?
Insertion of the above clause(aa) will put an additional condition for availing the input tax credit. From 1st January 2022, to claim input tax credit a taxpayer will have to satisfy all the five conditions
- Sec 16(2)(a) – Recipient should be in possession of tax invoice.
- Sec 16(2)(aa) – Supplier should have furnished the details of their outward supplies in Form GSTR-1 and the same should reflect in GSTR 2B of the recipient under sub-rule (7) of rule 60.
- Sec 16(2)(b) – Goods or services or both should be received by the recipient.
- Sec 16(2)(c) – Tax should have been paid by the supplier in cash or by utilizing ITC in respect of the outward supply.
- Sec 16(2)(d) – GST Return u/s 39 i.e. GSTR 3B should have been furnished by the supplier.
Implications of the insertion of Clause(aa) of sub-section (2) in Section 16
The taxpayer (recipient) will be eligible to claim the input tax credit of taxes paid to the supplier ONLY if the supplier files the return of outward supplies in Form GSTR-1 in the manner specified under section 37.
In other words, the recipient will not be permitted to take credit of taxes paid based on tax invoice or debit note unless the supplier files the details of the tax invoice in Form GSTR-1 which will then reflect the credit of taxes in Form GSTR 2B of the recipient.
According to this provision, now the taxpayer will have to be mindful about the timely return filing of their supplier in order to claim the input tax credit timely.
Whether the recipient should be denied credit of taxes paid for the fault of the supplier?
There is no denial to the fact that the menace of tax evasion, fraud, claiming an ineligible input tax credit, or ineligible refund has increased drastically after the rollout of GST. But does that warrant the Government to deny the credit of taxes paid to the recipient for the fault of the supplier? It has been a matter of discussion and debate from day one.
The government gets the opportunity of thoroughly verifying and scrutinizing the documents & place of business before granting registration to any person. A similar opportunity of verifying & scrutinizing documents will not be given to any businessmen before entering into any transaction. Rather, GSTIN becomes a benchmark of assurance.
BUT If such a person who was granted registration by the Government turns out to be a fraudster/tax evader, Shouldn’t Government reconsider the process of granting registration?
If such tax evader/fraudster could manipulate the Government even after such thorough verification then business counterparts can be easily made a victim of their fraud/tax evasion. (In simple words, if they could fool Govt they can fool others too)
Unless the Government has any valid proof that the recipient and the supplier have entered into a transaction with an intent of tax evasion/ fraud then the recipient should not be denied the input tax credit for the fault of the supplier.
There is a famous quote “You reap what you sow”. But with the introduction of the above clause, it is going to be “You only reap what your supplier sows”
Scenarios where it would result in blocking of working capital
- If the supplier doesn’t file GSTR 1/IFF before the prescribed due dates then the recipient will end up paying the tax liability instead of claiming legitimate ITC that month for the supplier’s fault.
- If the supplier enters an incorrect GST number while furnishing GSTR 1, then the recipient will end up paying the tax liability instead of claiming legitimate ITC that month for the supplier’s fault. Though the recipient will be allowed to claim the credit as and when the supplier amends the GST number in the GSTR 1.
- Why Government blocks the credit of the recipient for the fault of the supplier?
- Why Government has indirectly put the onus on the recipient to make sure that their supplier file returns and pay tax?
- Why Government doesn’t bring back Form GSTR-2 or allow the taxpayer to key in details of missing inward supplies in GSTR 2A & GSTR 2B or any other form for that sake?
- Will this clause make it mandatory to furnish details of outward supplies using the invoice furnishing facility for the taxpayers who have opted for quarterly returns under the QRMP Scheme? It will become difficult to survive in the market if they don’t file, the credit will not reflect in GSTR 2B of their recipient which will result in blocking of working capital and excess credit in the month in which return is furnished.
- In my opinion, it is very likely that this clause will be challenged in the near future. As one can be held responsible for their own deeds or misdeeds and not for the deeds of people they enter into business.