BackClaiming ITC becomes tougher with the new Section16(2)(aa) & proposed Section 38
Most taxpayers are taken aback that they may not be able to claim ITC just because their suppliers default; supplier compliance they feel is out of their hands. While this amendment is yet to be passed by Parliament, it could soon become a part of the GST law.
_1645176670344_1645176673208.jpg "Budget 2022")
PremiumIt’s been just over a month into the new year 2022, but GST-registered businesses have already witnessed several new restrictions to the input tax credit (ITC) claim process and could soon see some more. The year began with two major amendments to the GST law in the form of a new clause added to Section 16(2) of the Central Goods and Services Tax (CGST) Act, as well as an absolute restriction on provisional ITC. And now, even before taxpayers could file their returns for January, Budget 2022 proposed another set of stringent restrictions on ITC claims.
Taxpayers, both large and small alike, are probably wondering what the need for this level of stringency is. But, the government has its own reasons. Let’s dissect the new changes to the GST law introduced this year and find out how challenging the ITC claim process is going to be in the months ahead.
Introduction of a new clause in Section 16(2) and removal of provisional ITC
The amendment to Section 16(2) was introduced a long time ago in Finance Act 2021 but was only notified to taxpayers from 1st January 2022. According to the new clause (aa) under Section 16(2), taxpayers can claim ITC only if their vendors upload the particular invoice or debit note in their GSTR-1 return or Invoice Furnishing Facility (IFF). The invoice has to then reflect in the buyer’s GSTR-2B.
To support this change in law, Rule 36(4) of the CGST Rules governing provisional ITC also saw an amendment. According to this, the 5% provisional ITC allowed until December 2021 in cases where a business’s suppliers did not upload invoices on time is now no longer allowed to be claimed. The absolute restriction means that any taxpayer can now only claim input tax credit if their suppliers upload invoices, and the same is reflected in their GSTR-2B.
Budget 2022 took the stringency in the ITC claim process up a notch
Just when taxpayers were trying to come to terms with the new ITC changes, Budget 2022 dropped a big surprise by proposing a replacement Section 38 of the CGST Act. The new Section 38 prescribes how taxpayers can claim ITC going forward and contains a whole set of ITC restrictions that are tied to supplier compliance.
Most taxpayers are taken aback that they may not be able to claim ITC just because their suppliers default; supplier compliance they feel is out of their hands. While this amendment is yet to be passed by Parliament, it could soon become a part of the GST law.
Here are some of the major situations where ITC cannot be claimed on supplies if the new Section 38 becomes a part of the GST law.
1. The supplier is a business that is newly registered under the GST law.
2. The supplies are furnished by a supplier who has not paid their taxes for a certain period.
3. The supplier’s output tax liability payable is greater than the output tax liability paid during the said period.
4. The supplier has claimed more ITC than what was lawfully allowed.
5. The supplier has not paid their taxes in accordance with Section 49(12). To simplify it, the supplier has utilized more ITC from their electronic credit ledger than what was allowed under the law, etc.
Taxpayers should note here that the government is yet to prescribe the time periods and monetary limits for the restrictions above.
Why has the government taken such a drastic approach to restrict ITC claims?
One of the reasons for introducing GST in India was so that taxpayers could seamlessly claim input tax credit along the supply chain. But, the government soon realised that ITC claims have become one of the biggest sources of fraud, amounting to hundreds of crores each year. Fraudulent businesses issue fake invoices where ITC is claimed by the recipient businesses that are usually a part of the nexus.
If the revised Section 38 were to get implemented, it would be a good way to curtail ITC-related fraud. However, it could create an enormous burden on taxpayers as there is no good reason for any honest taxpayer to lose out on input tax credit just because their suppliers do not comply.
How can taxpayers make their ITC claim process more efficient if Section 38 gets introduced?
If Parliament was to pass the new Section 38, it would massively increase the compliance burden on taxpayers. Unfortunately, it seems the government may push through this change and businesses will have to find ways to remain compliant. When the GSTR-2A/2B and provisional ITC restrictions were introduced, taxpayers leveraged technology for ITC reconciliations to make their ITC claim process more efficient. Even now, with technology-oriented tools, it could be possible to comply with minimal effort.
Some of the changes businesses will need to look at incorporating would be-
-Rigorous vendor compliance checks at the onboarding stage to ensure that they only purchase from compliant vendors.
-Automated reconciliations run at frequent intervals in time through a compliance solution that is synced to the enterprise’s ERP.
-Automated vendor communication in case of missing invoices, followed by automated withholding of payments for frequently defaulting vendors.
No doubt, doing all of this could be easier for large enterprises that may have the money and manpower but will definitely be onerous for smaller businesses.
How does Clear help businesses with their ITC claims?
Clear has always followed a tech-based approach to solving any challenge in tax return filing, and simplifying compliance for enterprises. Clear’s advanced solutions help businesses to completely automate their ITC claims and vendor management process, which helps even more if Section 38 was to get implemented.
Businesses may soon need to look at rigorous compliance checks and dynamic reconciliation processes. They should withhold their vendors’ payments where invoices are not uploaded. Why lose out on precious ITC just because your vendors are non-compliant?
Even if Section 38 did not get implemented, having a real-time, automated ITC reconciliation process is the need of the hour, with provisional ITC now eliminated. Likewise, vendor communication and vendor payment management are also vital to ensure vendor compliance. Every business should look at adopting tech-based solutions to serve the two-fold goal of compliance and tax savings.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
