Reversal of ITC

As we all are aware, one of the main purposes behind the introduction of Goods and Services Tax (GST) was the availability/ allowability of a ‘seamless flow of credit’. However, factually, with each passing day and continuous changing GST law, availment of an input tax credit is getting complicated even for the genuine recipient/ buyer. We briefly discussed reversal of ITC under GST provision, recent addition to the eligibility and condition. 

 The present article will help you to travel with one of the most burning issues currently prevailing in the trade and market regarding the reversal of ITC on account of non-compliance by the supplier.

Eligibility and conditions for claiming the Input Tax Credit 

Provisions of section 16(2) of the Central Goods and Services Tax Act, 2017 lays down the conditions which the taxpayers need to satisfy for availing of the input tax credit under GST. The said conditions are explained hereunder –

  1. The taxpayer should have a valid tax invoice or debit note or any other prescribed document issued by the supplier on the basis of which input tax credit is to be availed;
  2. The taxpayer should have received the goods or services or both;
    • The supplier has furnished the details of the respective tax invoice or debit note via Form GSTR-1 return filing and the same is communicated to the taxpayer/ recipient via ;
  3. The supplier has discharged the tax relating to such invoice or debit note to the Government either via electronic cash ledger or via electronic credit ledger;
  4. The supplier has furnished in Form GSTR-3B return as prescribed under section 39 of the CGST Act.

Recipients, please beware, don’t be under the impression that if all the above conditions are satisfied, you are easily allowed to avail of the GST input tax credit. Notably, the Finance Act, 2022 has come up with some deadly provisions which are going to be effective from the date yet to be notified.

Some of the special relevant amendments are listed hereunder-

  • Clause (ba) is inserted to section 16(2) of the Central Goods and Services Tax Act;
  • Provisions of section 38 of the Central Goods and Services Tax Act are entirely substituted; and
  • Also, provisions of section 41 of the Central Goods and Services Tax Act are entirely substituted.

Please note that the explanation of the above highlighted amendments is briefly covered in the article below.

What are the recent conditions for claiming ITC

Reversal of ITC eligibility

Vide the Finance Act, 2022, clause (ba) is inserted to section 16(2) of the Central Goods and Services Tax Act, 2017 adding thereof one more condition for eligibility of input tax credit.

The new clause states that input tax credit with respect to the supply will not be available if the same is restricted as per the details provided in Form GSTR-2B under section 38 of the Central Goods and Services Tax Act.

Thus, in nut-shell, the newly inserted clause states that the taxpayer will be allowed to claim only eligible ITC reflected in Form GSTR-2B as per section 38.

Now, let us see what Section 38 of the Central Goods and Services Tax Act says. It is important to note here that earlier provisions of section 38 are also completely revamped vide the Finance Act, 2022. Accordingly, the new provisions of section 38 are simplified hereunder 

Section

Explanation

Section 38 sub-section (1)

Details of outward supplies furnished by the supplier in Form GSTR-1 will be communicated to the recipient in an auto-generated statement in Form GSTR-2B.

Section 38 sub-section (2)

Auto-generated statements [Form GSTR-2B]  received by the recipient will provide details of both the ‘eligible’ input tax credit and ‘ineligible’ input tax credit. Notably, an input tax credit will be marked as ineligible in GSTR-2B return filing under the following situations –

  • The supplier has obtained new registration;
  • The supplier has defaulted in payment of tax for the prescribed time limit;
  • Output tax payable by the supplier as per Form GSTR-1 exceeds output tax paid as per GSTR 3B return for the prescribed time limit;
  • Input tax credit availed by the supplier as per Form GSTR-3B is more than the input tax credit reflected in Form GSTR-2B for the prescribed time limit;
  • The supplier has defaulted in discharging the output tax liability as per provisions of section 49(12) of the Central Goods and Services Tax Act;
  • Supplier belongs to the prescribed class of person.

After going through the above provisions as well as the table, now, the availability of the GST input tax credit will largely depend on the supplier in the following manner –

Particulars

Details

Chances of input tax credit getting ineligible

The input tax credit will be ineligible, if –

  • Supplier is newly registered under GST;
  • The supplier has defaulted in complying with the GST return filing provisions;
  • The supplier has defaulted in payment of tax;
  • The supplier has availed excess input tax credit in Form GSTR-3B as compared to Form GSTR-2B;
  • The supplier has paid less tax via Form GSTR-3B as compared to output tax payable as per Form GSTR-1; etc. etc.

Availability of input tax credit

  • Satisfy all the conditions of Section 16(2);
  • The input tax credit should be reflected in Form GSTR-2B;
  • See that the supplier has duly paid the taxes to the Government;
  • Verify that the supplier has duly and accurately filed a GSTR 1 return; etc.  

Reversal of ITC: Provisions

First of all, let us look at the below circle reflecting various provisions trapping the recipient’s input tax credit on account of non-compliance by the supplier –

Reversal of ITC Provisions Explained 

An input tax credit is available to the recipient only if the supplier has furnished the details of the tax invoice/ debit note in Form GSTR-1, resulting into reflecting the same into Form GSTR-2B of the recipient.

In short, if the supplier has not furnished Form GSTR-1, the input tax credit of the same will not be reflected in Form GSTR-2B, accordingly, the input tax credit will not be available to the recipient.

Section 16 sub-section (2) clause (aa) of CGST Act, 2017

An input tax credit is available to the recipient only if the supplier has furnished the details of the tax invoice/ debit note in Form GSTR-1, resulting into reflecting the same into Form GSTR-2B of the recipient.

In short, if the supplier has not furnished Form GSTR-1, the input tax credit of the same will not be reflected in Form GSTR-2B, accordingly, the input tax credit will not be available to the recipient.

Section 16(2)(ba) of the Central Goods and Services Tax Act, 2017 –

As elaborately explained above, the provisions of section 16(2)(ba) simply states that the recipient is eligible to avail only those input tax credits that is not restricted (i.e., not held ineligible) as six situations stated under Section 38 sub-section (2) [refer table above].

Interestingly, all the six situations, resulting in to ineligible input tax credit in the hands of the recipient, are totally dependent on the due compliance by the supplier.

Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 –

The input tax credit is available to the recipient only if the supplier has paid the tax to the Government either via electronic cash ledger or via electronic credit ledger. If the supplier fails in payment of tax, even though if the tax is duly paid by the buyer to the supplier, buyer will not be eligible to avail the input tax credit.

Section 41 of CGST Claim of ITC and provisional acceptance

Entire provisions of section 41, dealing with the availment of the input tax credit, are substituted vide the Finance Act, 2022. As per the new provisions, if the supplier fails to pay the tax, the recipient is required to reverse the input tax credit. On top of that such reversal of ITC is to be done along with interest.

Rule 86A of CGST: Blocking of Credit

According to one of the conditions, the input tax credit will not be available to the recipient if the supplier is found to be non-existent.

Reversal of ITC on account of non-compliance by the supplier

Reversal of ITC on account of non-compliance

Going through the above provisions, before availing of the input tax credit, the recipient will have to go through the following steps –

Step 1

Confirm whether all the basic conditions, laid down under section 16(2), for claiming input tax credit are satisfied like having a valid tax invoice/ debit note/ receipt of goods or services etc.

Step 2

Confirm whether the supplier had duly furnished details in Form GSTR-1. The recipient can confirm the same by referring to the auto-generated statement in Form GSTR-2B.

Step 3

Confirm whether the supplier had duly paid the taxes via Form GSTR-3B.

Step 4

Reconcile the input tax credit availed as per books of account and as per Form GSTR-2B. Since there are chances of input tax credit getting ineligible in terms of section 38 [like supplier is newly registered or supplier has defaulted in payment of tax or supplier had availed excess input tax credit; etc.]

Reversal of ITC under GST: Major issues 

  1. The recipient lacks control over the supplier to ensure that the relevant tax is deposited by the supplier to the Government. Notably, the issue is being challenged and the same is pending before various High Court;
  2. As per the new provisions, input tax credit becomes ineligible in the hands of the recipient if the supplier has availed excess input tax credit. How can Government expect the recipient to verify the accuracy of the input tax credit availed by the supplier?
  3. Further, input tax credit becomes ineligible in the hands of the recipient, if the supplier has paid less output tax as compared to output tax liability reflected in Form GSTR-1. Here also, expecting the recipient to verify the accuracy of output tax paid by the supplier is beyond the control of the buyer/ recipient.

The most fundamental issue involved in the matter which remains unanswered is that how can input tax credit available to the recipient, who had duly paid the tax to the supplier, be denied on the omissions/ non-compliance on the part of the supplier.

It is always open to the department to take appropriate action against the defaulting supplier, but, the same should not hinder the bona fide recipient. 

Further, technically speaking, the recipient who has already paid the tax to the supplier is not allowed to avail of the input tax credit or asked to reverse the already availed input tax credit. Then, such a recipient is likely to hit double, as explained hereinbelow –

  1. Firstly, the recipient has already paid the tax to the supplier; and
  2. Secondly, due to a default committed by the supplier, an input tax credit is not made available to the recipient.

Conclusion on Reversal of ITC under GST

Going to the provisions of the Central Goods and Services Tax Act and CGST rules made thereunder, attached with the input tax credit availment by the recipient, and also the recent amendments vide the Finance Act, 2022. It is amply clear that the Government aims timely compliance, in terms of return filing and payment of tax, from the part of the supplier.

However, it is important to figure-out here that such non-compliance on the part of the supplier is likely to hinder the bona fide recipient. Government should promptly take steps to protect such genuine recipient.


CA Poonam Gandhi

About the author

Poonam Gandhi is a Chartered Accountant and a Lawyer. She is a Professional Freelance Content Writer/ Editor and an Educator.

She masters in creating result-oriented as well as Search Engine Oriented Content. Currently, she is associated with some of the topmost leading sites of India.

She holds more than 3 years of experience in the content field. Before entering the content writing field, she possessed a wide practice experience of more than 9 years, specifically, in the field of Indirect Taxation.

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  1. As already mail sent to u earlier. We had paid tax collected against service bill raised by us on our clients and file our GSTR 3B showing the same. However we missed the said bill in our GSTR-1 filing of the said quarter Q4 of 2020-21. As this was realised after September 2021 we had no chance to rectify the same. Further our Ledger balances is not showing credit of this amount mismatch between GSTR-1 liability & GSTR-3B payment.
    Kindly advise to sort out this. We are ok to pay your professional fees any charge on this.

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