Is it right to stop the buyer from taking ITC under the guise of law?

In this article, i will discuss the decisions made by the government on Availment of ITC and will correlate with the financial position of taxpayers and Indian Constitution. So let’s start.

On 9th October, 2019, the government inserted Rule 36(4) in the CGST Rules, 2017 by Notification No. 49/2019- Central Tax which prescribes that :
“(4) 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.”

From the above, we can understand that if we purchase goods in December, 2019 and paid CGST of Rs. 50,000 and SGST of Rs. 50,000 but corresponding suppliers uploaded invoices worth CGST Rs. 10,000 and SGST Rs. 10,000 in their GSTR-1.

Then in this case, the maximum ITC which we can claim in our GSTR-3B return is CGST Rs. 12,000 and SGST Rs. 12,000.

Amendment in Rule 36(4) : By issuing Notification No. 75/2019- Central Tax on 26th December, 2019, ITC availment ratio has been reduced from 20% to 10%.

If we take above example in amended case, then ITC available for the purchaser is CGST Rs. 11,000 and SGST Rs. 11,000.

Now let’s correlate it with the GST Act and Indian Constitution :

The validity of this rule will be questioned for the following reasons :
(1.) If the power to make this rule comes from Section 43A of the CGST Act, 2017, then Rule 36(4) is invalid because Section 43A is non-operational. Also this is against Article 265 of the Constitution of India and the basic legal principle that “Rules and Circulars can not override Act”

Abhishek Rastogi, partner at Khaitan & Co., said the restriction on credits due to the fault of the vendors will have to cross the constitutional test.

It will be more in detail, if we understand it with the decreasing financial position of the taxpayers :

M S Mani, partner at consultants Deloitte India, said the restrictions on ITC increase the blockages of working capital.

Harpreet Singh, partner at consultancy KPMG says that it is imperative for businesses to ensure timely credit reconciliation, including follow-up with vendors, timely correction and maintaining of adequate date for the said compliance. Wherever proper reconciliations are not done, it may lead to cash flow issues,” he said.

Conclusion : When Rule 36(4) is against the Indian Constitution and even the GST Act itself, then :

(1.) Why government has introduced it?

(2.) Is it introduced by the government to increase its revenue under the guise of law?

If you have any suggestion, please let me know in comment section.

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