Input Tax Credit Saga - Budget 2022

[Jigar Doshi]

The mechanism of Input Tax Credit (ITC) is the backbone of GST and is one of the most important objectives of GST. However, since the inception of GST, ITC has been one of the most disputed topics under the GST law for myriad reasons. The 4 years of GST has seen a plethora of changes in the laws governing ITC, the chronology of some of the most significant changes in ITC are as follows:

FY 17-18:   ITC to be availed basis the conditions specified in section 16 (2) of the CGST Act, 2017. Though the provisions for matching were provided under the GST law, the same was not being made active.

FY 18-19:    The concept of Provisional ITC was introduced vide Notification No. 49/2019 - Central Tax, wherein ITC was restricted to 120% of the eligible ITC reflected in GSTR-2A return.

FY 19-20:    The quantum of Provisional ITC was reduced to 110% and subsequently to 105% of the eligible ITC reflected in GSTR-2A return.

Subsequently, Budget 2021 had amended section 16 of the CGST Act, 2017, to restrict the ITC entitlement to the extent of ITC matched with GSTR 2B. With the constant changes being introduced by the government to streamline the ITC mechanism, Budget 2022 is no different.  Various changes which were proposed by the Hon’ble Finance Minister vide The Finance Bill, 2022, have been encapsulated below with our take on the same:

Section under CGST Act	Amendments in Budget 2022	Our take
Section 16	In Section 16: (a) in sub-section (2),– (i) after clause (b), the following clause shall be inserted, namely:– “(ba) the details of input tax credit in respect of the said supply communicated to such registered person under section 38 has not been restricted;”; (ii) in clause (c), the words, figures and letter “or section 43A” shall be omitted; X` (b) in sub-section (4), for the words and figures “due date of furnishing of the return under section 39 for the month of September”, the words “thirtieth day of November” shall be substituted.	Section 16(2) of the CGST Act 2017, lays down the mandatory conditions for availment of ITC. An additional condition has been proposed by insertion of clause Section 16(2) (ba), wherein ITC in respect of invoices uploaded by supplier and which are classified as Available (i.e. which are not classified as ‘Credits Not Available’ as per GSTR‐2B return), will only be allowed to be availed by the recipient. Further, the amendment in Section 16(4) is a much-applauded move for the taxpayers, as the time-limit has been extended by approximately two months and the taxpayer would now have the option to rectify the errors which may be observed during the filing of Income Tax return.
Section 38	“38. (1) The details of outward supplies furnished by the registered persons under sub-section (1) of section 37 and of such other supplies as may be prescribed, and an auto-generated statement containing the details of input tax credit shall be made available electronically to the recipients of such supplies in such form and manner, within such time, and subject to such conditions and restrictions as may be prescribed. (2) The auto-generated statement under sub-section (1) shall consist of–– (a) details of inward supplies in respect of which credit of input tax may be available to the recipient; and (b) details of supplies in respect of which such credit cannot be availed, whether wholly or partly, by the recipient, on account of the details of the said supplies being furnished under sub-section (1) of section 37,–….	Budget 2022 lays has done away with the concept of matching of ITC by omitting section 42 and section 43 of the CGST Act, 2017. The new proposed section 38 states that an auto-generated statement (Form GSTR-2B), shall be made available to the recipient of supply providing details of the ITC which would be available and ITC which would not be available to the recipient. This amendment is to streamline the law as per the current return system.
Section 41	(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to avail the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited to his electronic credit ledger. (2) The credit of input tax availed by a registered person under sub-section (1) in respect of such supplies of goods or services or both, the tax payable whereon has not been paid by the supplier, shall be reversed along with applicable interest, by the said person in such manner as may be prescribed: Provided that where the said supplier makes payment of the tax payable in respect of the aforesaid supplies, the said registered person may re-avail the amount of credit reversed by him in such manner as may be prescribed.”	The newly proposed amendment has been introduced with the intention to do away with the concept of claiming ITC on Provisional basis. Rather, ITC shall now be available on self-assessment basis. Further, in order to curb Fake Invoicing and strengthen section 16 of the CGST Act, the proposed amendment states that if tax has not been paid by the supplier of inputs then recipient would have to reverse the ITC to that extent.
Section 42, Section 43 and Section 43A	Sections 42, 43 and 43A of the Central Goods and Services Tax Act shall be omitted.	The provisions of the above sections were not notified and were more relevant to the return processes envisaged during the implementation of GST wherein GSTR 2 and GSTR 3 were to be activated in a phased manner. Since these sections were redundant to the current return filing process, the same are now omitted from the provisions of law. Hence, in order to do away with the two-way matching process, the government has deleted the said sections of the CGST Act, 2017. Hence, post the amendment ITC would have to be availed only on the basis of Form GSTR-2B.
Section 49	In section 49 of the Central Goods and Services Tax Act,–– … (d) after sub-section (11), the following sub-section shall be inserted, namely:–– “(12) Notwithstanding anything contained in this Act, the Government may, on the recommendations of the Council, subject to such conditions and restrictions, specify such maximum proportion of output tax liability under this Act or under the Integrated Goods and Services Tax Act, 2017 which may be discharged through the electronic credit ledger by a registered person or a class of registered persons, as may be prescribed.”.	Notification 94/ 2020 – Central Tax dated December 22,2020, had introduced Rule 86B of the CGST Rules, 2017, which mandates cash payment of 1% of the output tax for certain category registered person. However, the said rule had no backing under the CGST Act, 2017. Thus, the said amendment was made in order to streamline the CGST Act, 2017, with the CGST Rules, 2017, and thus avoid litigation on this front.
Section 50	In section 50 of the Central Goods and Services Tax Act, for sub-section (3), the following sub-section shall be substituted and shall be deemed to have been substituted with effect from the 1st day of July, 2017, namely:–– “(3) Where the input tax credit has been wrongly availed and utilised, the registered person shall pay interest on such input tax credit wrongly availed and utilised, at such rate not exceeding twenty-four per cent. as may be notified by the Government, on the recommendations of the Council, and the interest shall be calculated, in such manner as may be prescribed.”.	The said amendment has been given a retrospective effect form July 1, 2017, in order to provide for levy of interest on input tax credit wrongly availed and utilized. i.e. Interest will not be levied if ITC is not utilized. Further, Notification No. 13/2017 – Central Tax, dated the 28th June, 2017, is being amended retrospectively, with effect from the July 1, 2017, so as to notify rate of interest under section 50 (3) of the CGST Act, 2017, as 18% in lieu of 24%. Thus, ending a long saga of tussle between the taxpayers and the department with regards to levy of interest and the applicable rate of interest thereon on the excess ITC availed.

Thus, there appears no end to this long and dark tunnel of ever-evolving ITC under the GST law. The Central Government’s principle of “Minimum Government - Maximum Governance” seems to have become bleak with new ITC restrictions being set out by the government at regular intervals.

Though, the government might justify its stance by stating that such restrictions were in order to curb the Fake Invoicing, the possibility of distressing the honest taxpayers can’t be denied. The very foundation of the Indian judiciary system is that “the law holds that it is better that 10 guilty persons escape than that 1 innocent suffer.” stands defeated by bringing in such ITC restrictions.