NEW YEAR BRINGS IN NEW RESTRICTIONS FOR INPUT TAX CREDIT (ITC)

[Dr. Sanjiv Agarwal]

While Section 16 of CGST Act, 2017 provides for eligibility and conditions for taking input tax credit, Rule 36 of CGST Rules, 2017 prescribes documentary requirements and conditions for claiming input tax credit.

Presently, Rule 36(4) provides 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 10 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.”   

Vide Notification No. 94/2020-Central Tax dated 22.12.2020, various amendments have been made in Rules. Following two amendments have been made in Rule 36(4) of CGST Rules, 2017.

• Return u/s 37(1) has to be furnished, not merely uploaded by the supplier
• The availment of credit to be taken has been restricted to 5% instead of 10% presently.

This change is effective from 1^st January, 2021

Thus, credit of Input Tax for the invoices not furnished is now restricted to 5% of the tax for invoice details furnished effective from 01.01.2021. Earlier the limit was 10%. Further, now merely the invoices being uploaded would not be sufficient to claim the credit of the input tax. 

The amended rule makes restrictions on ITC being taken stricter by curtailing the percentage of ITC to be taken and linking it to furnishing of GST return in Form GSTR-1. These restrictions are:

ITC claim in respect of invoices which are not uploaded by any vendor in its Form GSTR 1 or through Invoice Furnishing Facility (IFF) will now be allowed maximum upto 5% (currently it is 10%) of the invoices furnished by the vendors in their Form GSTR 1 or IFF Facility.

The new reduced limit of 5% shall be effective from January 01, 2021 i.e., it will apply to all invoices including invoices which are dated or issued on or after January 01, 2021.

It may be noted that the restriction of claiming input tax credit has been varied frequently and can be traced as follows:

Period	Restriction
01.07.2017 to 08.10.2019	NIL
09.10.2019 to 31.12.2019	20
01.01.2020 to 31.12.2020	10
W.e.f. 01.01.2021	5

Impact of Amendment

The 100% Input Tax Credit has to be availed based on invoices / debit notes, details of which have been furnished by the supplier.

In case, such details are not furnished in GSTR-1 by the supplier, then input tax credit can be availed upto 5% of such invoices. This limit is 10% presently but w.e.f. 01.01.2021; this limit will be 5% only. This will result in blocking of credit (funds) to the extent of limit prescribed and result in pressure on working capital of the taxpayer. Such restrictions has been stipulated without any fault or non-compliance of the taxpayer.

Taxable person claiming input tax credit should ensure and prevail upon suppliers to file timely returns.