Input Tax Credit Rule 36(4) of CGST Rules.

Jan 17, 2023 | Blog | 0 comments

Rule 36(4) has been the most discussed topic in GST parlance nowadays. Input Tax Credit which was introduced in GST as the biggest reform in Indirect Taxation was exploited by some people with malicious intent and the consequences of which is now borne by Innocent Taxpayers with the Introduction of Rule 36(4) though which various restrictions are made for availing Input Tax Credit. Let’s understand what is Rule 36(4) and what are the changes made in it over the period of time.

Introduction:

First let’s Understand what Rule 36(4) states:

No input tax credit shall be availed by a registered person in respect of invoices or debit notes the details of which are required to be furnished under sub-section (1) of section 37 unless ,-

(a) The details of such invoices or debit notes have been furnished by the supplier in the statement of outward supplies in FORM GSTR-1 or using the invoice furnishing facility;
(b) the details of [input tax credit in respect of] such invoices or debit notes have been communicated to the registered person in FORM GSTR-2B under sub-rule (7) of rule 60.]

As per the said rule:

Input Tax Credit can be availed by a registered person only in respect of those invoices and debit notes:

  • The details of which have been furnished by supplier under Section 37(1) i.e. GSTR-1, &
  • The same is reflected in GSTR-2B of the recipient.

Amendments over time

Rule 36(4) has been amended from time to time wherein govt. initially allowed provisional Credit over and above the Credit as appearing in GSTR-2A/GSTR2B through Various notifications as follows:

Amendments over time on ITC rule 36(4)

Notification No. % of Provisional ITC over and above GSTR-2A/GSTR-2B Effective Date
49/2019 dt.09/10/2019 20% 01/10/2019
75/2019 dt.26/12/2019 10% 01/01/2020
94/2020 dt. 22/12/2020 5% 01/01/2021
40/2021 dt. 29/12/2021 0% 01/01/2022

Practical Situation: Considering the amendments in above table over a period of time, though there was an option to avail provisional Credit but considering the practical difficulties, people were reluctant to take effect of Provisional Credit in their ITC working considering various ambiguities and Complexities because if in case there is Excess Claim of Credit then Interest is charged @ 24%. But since w.e.f. 01/01/2022 govt. has scrapped the Provisional Credit and now only the Credit as reflecting in GSTR-2B can be claimed.

ITC outside the purview of Rule 36(4):

  • ITC under Reverse Charge Mechanism subject to Section 17(5) (including RCM on Import of Service), which is availed on the basis of Self Invoice.
  • ITC on Import of Goods, which is availed on the basis of Bill of Entry.
  • Re – Availment of Credit under Rule 37.
  • ITC distributed by Input Service Distributor as the same is reflected in GSTR-6A.
  • Re – Availment of Credit based on Annual Calculation of Rule 42.

Impact of Rule 36(4) on Different Stakeholders:

As we know that everything comes with Pros and Cons of its own on different set of people.         In our case the interested stakeholders are Govt. and Taxpayers. Let’s try to understand the Impact of Rule 36(4) on both the parties:

Related topic: GST Refund in case of Export

Impact on Government:

  • Timely and More Accurate filing of GSTR-1 by registered person due to Matching process followed by their Respective Recipients.
  • No Fake ITC in the industry because of Matching Process and other Stringent Compliances.
  • Increase in Revenue.

Impact on Taxpayers :

  • Increased burden of Matching Individual Invoices of Purchases with the Respective Supplies as reported by Supplier.
  • Adverse Impact on the Working Capital because there will be more outflow of Cash if in case there is non-compliance or say late reporting of Invoices/Return by their respective suppliers.

Practical Difficulties in Implementation:

  • Quarterly Return Filers: If in Case purchase is made from a registered person who has opted Quarterly Filing of GSTR-1 will file their return on Quarterly Basis. Consequently the Registered Recipient will not be able to take the Credit of Inputs for nearly 4 months in respect of such purchases and will have an adverse impact on Working Capital Requirements.

 

  • Refund for Unutilized ITC: If in case the Registered person is not able to take a seamless Credit of Inputs and if rate of Inputs is higher than the rate of Output then at the time of Filing of GSTR-3B they will have to discharge their liabilities in Cash. Therefore, when the ITC will get credited to their Electronic Credit Ledger then they will have to go through the Refund Process which again involves various compliances as per Section 54.

 

  • Increased Burden of Reconciliation: After introduction of Rule 36(4), taxpayers will have to incur extra Cost and Time in reconciling their Purchases with respective supplies as reported by the supplier. Now there can be various issues in this reconciliation which are as follows:
  1.  Incorrect GSTIN of Recipient
  2. Difference In Value
  3. Mismatch in Invoice no.
  4. Reporting in B2C instead of B2B
  5. Non-reporting of Invoice in GSTR-1

Considering the above issues now Recipient will have to take follow ups from the supplier on regular basis which could end up in dispute and affect their business relations with Supplier despite the fact that tax may have been deposited to govt. by the supplier but ITC could not be availed by Recipient.

  • Cost of Blocked Working Capital: Despite paying tax to the supplier, the recipient will not be able to take Input Tax Credit if there is any non-compliance on part of Supplier and will have to discharge his output tax liability in Cash, consequently blocking the Working Capital till the time Invoice is not reflected in GSTR-2B.

Validity of Rule 36(4)

As per Section 16, following basic conditions need to be satisfied:

  • Recipient is in Possession of a Valid Tax Invoice
  • Goods/Services have been received by the Recipient
  • Supplier has deposited the tax to the govt.
  • Returns have been filed by recipient

Though filing of returns is in hand of Recipient but whether tax is paid by Supplier is not in his hands. It is duty of Supplier to take tax from Recipient and deposit it with govt. and that is why it is called Indirect Tax. If the supplier does not deposit tax to the govt. even after collecting the tax from the recipients then ideally Supplier should be penalised and not Innocent Recipients who have duly paid the taxes to the Supplier.

From the above analysis, it can be said that Rule 36(4) is valid for the govt. but for the Innocent Taxpayers it seems to be very harsh and Stringent. 

It is righty said that the Input Tax Credit which was considered as a Blessing for Businesses at the time of Introduction of GST is now considered as Curse with continuous changes being made by Govt. GST law is becoming more and more complex by passage of time, as compared to what was expected to be Good and Simple Tax.

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