The Central Board of Indirect Taxes & Customs (CBIC) tweaked the ITC norms by bringing in a new rule ‘36(4)’ in the Central Goods and Services Tax Rules, 2017 and it was notified on October 9. This section has been challenged in the High Court of Gujarat. After the first hearing, the Court issued notices to five respondents, including the GST Council, the CBIC and the Goods and Services Tax Network (GSTN), and fixed December 18 as the next date of hearing.

Commenting on the issue, Rajat Mohan, Senior Partner with AMRG, said the Government, under immense pressure of fiscal deficit, is experimenting novel and exceptional measures to tap additional GST resources in a big to blow unorganised sectors, which, in turn, is creating incomprehensible tax law for every law-abiding taxpayer.

“This new 20 per cent rule has created massive unrest in the corporates giving them unimaginable timelines to match tax credit on a monthly basis. This rule would also force taxpayers to defer legitimate availment of tax credit where the procurements are made from MSME (Micro, Small and Medium Enterprises) vendors, forcing the corporates to shift focus from home-grown MSME players,” he said.

The new provision :

The new provisions read as follows, “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 under sub-section (1) of section 37, shall not exceed 20 per cent of the eligible credit available in respect of invoices or debit notes, the details of which have been uploaded by the suppliers under sub-section (1) of section 37.”

It was inserted to curb the menace of fake invoices. In September, the investigative arms of the Finance Ministry conducted a joint operation against exporters who were claiming refund of Integrated Goods and Services Tax (IGST) fraudulently. The IGST is levied on inter-State movement of goods. It was found that ITC of more than ₹470 crore against invoice value of approximately ₹3,500 crore was bogus/fake.

In a reply to a question in the Lok Sabha, the government said during 2018-19, 1,620 cases of fake invoice(s) involving fraudulent ITC of ₹11,251 crore were booked by Central GST authorities. Similarly, the first three months of the current fiscal saw 535 cases involving an amount of ₹2,565 crore.

Though experts feel the intention is good, It will actually mean that the companies need to monitor whether the suppliers are uploading their returns on a regular basis. Most companies are likely to feel the pinch of the amendment.

Early this week, the government issued clarification saying that it is the responsibility of the GST payer to follow and restrict the credit to 20 per cent in case of non-filers. Also the restriction of 20 per cent is not to be computed supplier but consolidated-wise. The restriction of 20 per cent doesn’t apply to IGST paid on import, Reverse Charge Mechanism and credit transfer through Input Service Distributor