Impact Analysis of Rule 37A : No Immediate ITC Reversal for Non-filing of GSTR-3B by suppliers

[Vivek Jalan]

In a Welcome Step, the CBIC has inserted Rule 37A in The CGST Rules 2017 w.e.f. 26^th December 2022 vide Notification 26/2022 Central Tax. In the past five years of GST, there have been upteen notices and also many ITC-Reversals have been made by the recipients of goods/services incase the GSTR-3B has not been filed by the suppliers. The department generally invoked Section 16(2)(c) of The CGST Act 2017 contesting that the pre-condition for availing ITC that the corresponding Tax should have been paid, has not been fulfilled in such cases. This was struck down by The Courts in various decisions like D.Y.Beathel Enterprises - due to the fact that suppliers were existing and that the department should start the recovery proceedings against the suppliers rather than the recipients. Incase the suppliers do not pay, then the department could come to the recipients for recovery of the said taxes.

Further, in some cases when the recipients actually did reverse the ITC and thereafter even after the supplier paid the taxes, there was no mechanism that the recipients reclaim the ITC so reversed. This led to collection of taxes by Department without the authority of Law and was violative of Article 265 of The Constitution of India.

Now Rule 37A has been inserted which provides some relief to the genuine recipients. Rule 37A states as follows -

“37A. Reversal of input tax credit in the case of non-payment of tax by the supplier and re-availment thereof.- Where input tax credit has been availed by a registered person in the return in FORM GSTR-3B for a tax period in respect of such invoice or debit note, the details of which have been furnished by the supplier in the statement of outward supplies in FORM GSTR 1 or using the invoice furnishing facility, but the return in FORM GSTR-3B for the tax period corresponding to the said statement of outward supplies has not been furnished by such supplier till the 30th day of September following the end of financial year in which the input tax credit in respect of such invoice or debit note has been availed, the said amount of input tax credit shall be reversed by the said registered person, while furnishing a return in FORM GSTR-3B on or before the 30th day of November following the end of such financial year:

Provided that where the said amount of input tax credit is not reversed by the registered person in a return in FORM GSTR-3B on or before the 30th day of November following the end of such financial year during which such input tax credit has been availed, such amount shall be payable by the said person along with interest thereon under section 50.

Provided further that where the said supplier subsequently furnishes the return in FORM GSTR-3B for the said tax period, the said registered person may re-avail the amount of such credit in the return in FORM GSTR-3B for a tax period thereafter.”

The Analysis of the salient features of the rule are as follows –

1. There is a relief for B2B recipients u/r 37A as they do not have to reverse ITC immediately on suppliers not filing their GSTR 3B.

2. If we take the example for FY 22-23, then incase till 30^th Sep. 2023 suppliers do not file their GSTR 3B also, then the recipients need to reverse their ITC by 30^th Nov 2023.

3. No interest required to be paid for this period of enjoyment of ITC also.

4. However incase ITC is not reversed in the return for Nov 2023, then Interest needs to be paid post 30^th Nov’ 2023. The question remains that whether interest then needs to be paid only for the period post 30^th Nov 2023 or from the inception of ITC availment? Our legal submission is that even in this case the interest needs to be paid only post 30^th November 2023.

5. Furthermore incase post that, incase the supplier files its GSTR 3B, then the recipient can reclaim the ITC - just like Rule 37.

6. There will not be any time barring period for such reclamation of ITC.

7. However incase the supplier files its GSTR 3B but there is a mismatch between its GSTR 1 and GSTR 3B of the suppliers by more than a certain %, then the Government may block the corresponding ITC instantly u/s 38(2)(b) of The CGST Act 2017.

8. The question is that would this Rule apply incase during the interim period the suppliers GSTIN is cancelled/suspended ab-initio; Our legal submission is that the benefit of the rule would be available even in such cases provided GSTR 1 is filed by the supplier.

9. Another question is that incase for earlier periods the recipients have reversed the ITC for non-filing of GSTR 3B by suppliers; and now the suppliers have filed their GSTR 3B, then for earlier reversals can the ITC be reclaimed? - Our legal submission is - yes the ITC can be re-claimed on the basis of 2^nd provisio to Rule 37A which is applicable w.e.f. 26^th December 2022.

Overall , while every amendment would always lead to questions, yet this is a welcome amendment and would help the taxpayers who were grappling with notices in the matter.