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Budget 2021: Revised Conditions for Input Tax Credit 

Budget 2021

The Union Budget of 2021 was long-awaited, especially after the unfortunate Covid-19 outbreak and all the ill-consequences thereafter.

The annual financial statement for the FY 2021 has introduced some changes in the GST Act of 2017 w.r.t the Input Tax Credit section of the CGST Act of 2017., 

The Goods and Service tax has now become 4 years older and the Government is consistently trying to simplify the GST return filing processes and the interaction with GSTN. 

Stick till the end of the article to understand the complete details of the conditions put on availing maximum Input Tax Credit.

What is the new Budget 2021 update on ITC under GST? 

input tax credit

There has been an addition of a clause in Section 16 of the CGST Act, 2017. This section is concerned with the Input Tax Credit and hence, this new amendment becomes important for us.

What was the GST Act, 2017 provision before Budget 2021?

Section 16, sub-section 2 of the GST Act, 2017 did not include the mandatory requirement to furnish the details by the vendors and the consequent communication to the recipient. 

This has now changed with the recent addition of clause aa.

Why is Section-16 (Input Tax Credit) important?

Budget 2021
Chapter V, Section 16 of the CGST Act of 2017 talks about the ‘Eligibility and Conditions to take Input Tax Credit’. 

This section comprises four different subsections

Sub-Section

Description

Sub-section (1)

Eligibility for taking Input Tax Credit (ITC)

Sub-section (2)

Conditions to satisfy for taking Input Tax Credit

Sub-section (3)

w.r.t depreciation of tax component

Sub-section (4)

Time deadline to avail Input Tax Credit benefit

Tell me more about the Budget 2021update on Input Tax Credit

input tax credit with example
Let me give you a brief on the recent update. There is an insertion of a new clause (aa) in Subsection (2) (conditions to satisfy for taking the Input Tax Credit benefit) of Section 16 of the CGST Act. 

The newly added clause defines that, ‘the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37’ Getting too heavy to understand? 

Do not worry! We'll put it in simpler words.

Input Tax Credit on invoice or debit note can be availed ONLY when the details of such an invoice or debit note have been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note.

In case of failure of either of the prescribed actions, the registered person will not be entitled to avail the credit on the Input tax for that particular invoice or debit note.

It is one more condition added to the list of eligibility conditions applicable for the entitlement of ITC.

According to Section 37 of the Goods and Services Tax Act, 2017, every registered person shall furnish the details of the outward supplies of the goods or services or both,

and such details shall be communicated to the recipient of the said supplies within prescribed time and in such manner as may be prescribed.

The new sub-clause (aa) added in Section 16 of the GST Act, makes the above-mentioned provision MANDATORY to get the entitlement of credit on the input tax i.e. ITC.

Important Rules In connection With ITC Amendment

ITC rules
Rule 36 of CGST Rules, 2017:-This rule specifies the documentary requirements and conditions for claiming the Input Tax Credit.  Section 16 of the CGST Act, 2017 strictly abides by Rule 36 and thus has to be understood together.
Rule 36(4) of CGST Rules, 2017:- This rule is majorly concerned with the constraints put on availing of ITC benefit. It blocks the credit relating to the invoices NOT uploaded by the suppliers in their FORM GSTR-1 to the extent of 5%.

NOTE: According to the new clause (aa) added in Section 16 of the CGST Act, this rule becomes of utmost importance to be fulfilled to get the benefit of the Input Tax Credit.

Other conditions prescribed in Section 16 are also necessary to be fulfilled.

Rule 59(3) of CGST Rules, 2017:- The details of outward supplies furnished by the supplier shall be made available electronically to the concerned registered persons (recipients) in Part-A of FORM GSTR2A, in FORM GSTR-4A, and FORM GSTR-6A through the common portal after the due date of filing of FORM GSTR-1.

Illustrative Example

Consider two entities, Firm Sheldon and Firm Penny. Firm Sheldon is the Supplier. (SS) Firm Penny is the Recipient.(RP)

Possible Cases

Result

SS furnishes details of outward supplies details. Doesn’t communicate with the Recipient RP with the invoice details.

NOT Eligible for ITC claim

Supplier SS furnishes details of outward supplies details.  Communicates with the Recipient RP with the invoice details.

Eligible for ITC claim

From this example, we can understand that furnishing the invoice or debit note details by the supplier is not only necessary but it is mandatory.

The concerned Supplier should send the details of filing these details on the portal to the recipient receiving the goods or services or both.

Conclusion on Budget 2021 update

In this article, we understood the revised eligibility added by the Finance Bill, 2021 for availing the Input Tax Credit.

We tried to interlink the back-dated rules with the recently added update and also tried to understand its significance. Keep visiting our page to get the latest updates for all the GST developments.

Until the next time... 

Important downloads for reference


Gaurav Yadav

About the author

Gaurav is an Engineer by training with a deep interest in Economics & Finance. He has been associated with the Fin-Tech industry for quite some time now. He writes for GSTHero for topics including GST Compliance, GST Structure, etc & aims to break down complicated technical jargon into simple terms for the taxpayers.His expertise includes GST Laws, Corporate Finance & Macro-Economics.

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