Unveiling the essence of the input tax credit – Taxation


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Amid India’s ongoing struggle with the pandemic and economic uncertainty, the Union Budget 2022 was still fair to meet the country’s long-term vision, despite some gaps in the proposals under GST. One such confusing amendment relates to GST warps and wefts – which is the Input Tax Credit (“ITC”). The fungibility of the tax credit is an integral part of indirect taxation and is based on the essential principle of passing on the tax burden to the final consumer. Despite this, the provisions relating to the use of ITC, as envisaged in Article 16 of the CGST law, still seem to be under close scrutiny by the government. The ITC provisions have time and again witnessed multiple transformations, defeating the purpose of an integrated credit that was the key bedrock of the GST system.

Article 16 of the CGST law postulates certain essential conditions for the beneficiary of goods or services to obtain credit. In October 2019, Rule 36(4) of the CGST Rules was notified which limited the ITC regarding unmatched invoices to 20% of the matched invoices – what was commonly referred to as “provisional ITC”. Eventually, this threshold was reduced to 10% and then to 5%. In the end, the concept of “provisional ITC” was canceled see Notification No. 39/2021-Central tax of December 21, 2021 and clause (aa) under Article 16(2) which was discussed at the 45and The GST Board meeting of September 17, 2021 came into effect on January 1, 2022. Accordingly, Rule 36(4) of the CGST Rules has also been amended to restrict the use of ITCs to the extent that it is reflected in the automatically generated GSTR 2B statement, i.e. the details uploaded by the supplier.

With this amendment, it can undoubtedly be stated that the recipient’s use of ITC would be entirely dependent on the act of the supplier, reversing the “two-way communication” that was proposed when the GST was implemented. In addition, amendments are proposed to Sections 37, 38 and 41 to repeal the provisions for filing GSTR 2 (which was introduced at the start of the GST but has remained suspended).

In line with the above, a new condition has been proposed in the Union Budget 2022 by the introduction of subsection (ba) of Section 16(2) to provide that the ITC would not be available if this is limited in the details provided in GSTR 2B – which separates the details of eligible and non-eligible ITCs.

As if abolishing the concept of “provisional ITCs” weren’t enough, the 2022 budget added another twist to the story by proposing to freshly replace section 41 which suggests 100% use of ITCs provided that these are deposited with the old cheque. Otherwise, the cancellation of it with the payment of interest is required. The said amendment proposes to charge interest to the beneficiary for the supplier’s error, which is contrary to the established principle of non-recovery of taxes from the buyer unless the remedies against the seller have first been exhausted by the government. It would indeed be interesting to see whether this amendment endures the principles laid down by various authorities on several occasions. It is worth mentioning that finding out if the seller has paid the tax and tracking it would continue to be a tumultuous business for the recipient. Nevertheless, it would be desirable to ensure strong legal recourse against suppliers by tightening supplier contracts.

However, unlike the existing provisions, this section allows for the recapture of ITCs following rectifications made by the supplier, which advances many steps towards achieving the objective of GST reform. Be that as it may, another issue of the proposed amendments concerns the fate reserved for the reimbursement of the interest thus paid.

Further on, the 2022 finance bill see Article 16(4) of the CGST law proposes to revise the deadlines for availing oneself of the ITC of any invoice/debit note for the supply of goods/services until November 30 following the end of the financial year in which this invoice or debit note relates to or the provision of the annuity declaration, whichever comes first (which, according to the existing provisions, is prior to September 30 or the filing of the annual declaration). This increased time to qualify for ITC would be a respite for many taxpayers, as there would be some extra time available after books of accounts are finalized after which any missed ITC can be used.

Extending the time to qualify for ITC by two months and simultaneously restricting the use of ITC only with respect to details auto-populated in GSTR 2B is certainly bittersweet chocolate for taxpayers. However, it is worth considering whether the November 30 deadline restriction would be applicable to claim ITCs as stated in the aforementioned paragraph.

Another intriguing amendment is proposed by replacing article 49 (10) of the CGST law relating to the authorization to transfer the unused balance of the ITC in the electronic cash register between separate persons (i.e. say entities with the same PAN but registered in different states) without opting for reimbursement. procedure. This modification is made as a result of the decisions taken at 45and GST Council meeting. However, in the same way, one can think about the possibility of transferring the unused balances of IGST and CGST to the electronic credit register of separate persons. Overall, it can be fair to conclude that the 2022 Union budget was a Pyrrhic victory for taxpayers.

Posted in LIBOR – TaxIndiaOnline

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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