Introduction
The Finance Act, 2022 substituted Section 41 of the Central Goods and Services Tax Act, 2017 ('CGST Act'), with effect from 1 October 2022[1].
Thus, from 1 October 2022, a taxpayer is allowed to self-assess and claim ITC for goods or services in their returns, with the credited amount going directly to the Electronic Credit Ledger (‘ECL’). Additionally, the taxpayer is mandated to reverse such ITC along with applicable interest if the supplier fails to pay tax in respect of such goods or services. Such ITC can be re-claimed by taxpayers upon payment of the tax by the respective suppliers for the concerned supplies.
The 48th GST Council meeting held on 17 December 2022, recommended the introduction of Rule 37A[2] into the Central Goods and Services Tax Rules, 2017 ('CGST Rules'). This rule delineates the manner for ITC reversal and credit to be re-claimed in terms of Section 41.
GSTN Advisory
Recently, the GSTN issued an advisory titled 'ITC Reversal on Account of Rule 37(A)' dated 14 November 2023, wherein it was informed that the system has calculated the amount of ITC required to be reversed under Rule 37A for FY 2022-23 and the same has been communicated to taxpayers via email.
The advisory emphasized that taxpayers should take note of this information and ensure that any ITC availed by taxpayer for which the return in GSTR-3B for the said period had not been furnished by their supplier till the 30th day of September following the end of financial year in which the ITC in respect of such invoice or debit note had been availed, then it had to be reversed under Table 4(B)(2) of GSTR-3B before 30th day of November following the end of such financial year.
Though, the advisory states that it has been issued to facilitate the taxpayers, there appears to be various ambiguities surrounding the same. Certain ambiguities pertaining to the advisory have been explained below.
What is the period considered for computation of amount of ITC to be reversed under Rule 37A?
As per the advisory, it appears that the ITC to be reversed under Rule 37A has been computed for the entire of FY 2022-23. However, it is important to note that the condition for reversal of ITC due to non-payment of tax by suppliers, as per Section 41(2) was implemented only from 1 October 2022, and the mechanism to reverse the said ITC was introduced by way of Rule 37A with effect from 26 December 2022.
Since for the period prior to 26 December 2022, there was no mechanism prescribed for reversal of ITC, the amount of ITC to be reversed for FY 2022-23 should ideally be calculated from the period post 26 December 2022. Here, it may be contended that the provision mandating such reversal was implemented from 1 October 2022. Therefore, even if such contention is considered, the period for reversal of ITC should be computed from 1 October 2022, and not for the entire FY 2022-23. As the advisory has not specifically mentioned the period for computing the ITC reversal amount and it only mentions FY 2022-23, clarity with regard to the period is awaited. It is advisable that the taxpayers look into the ITC amount communicated for reversal via email and check the period that has been considered for computing the ITC. With respect to any ITC pertaining to the period prior to 26 December 2022, clarification may be sought by the taxpayers since the mechanism for reversal prior to 26 December 2022 was not available under GST Law. In appropriate cases, challenge to such mails for reversal for the entire period of FY 2022-23 may also be contemplated exercising writ jurisdiction of the Hon'ble High Court.
Whether the data of GSTR 2A or GSTR 2B is considered for computation of the said ITC reversal amount?
The advisory indicates that taxpayers must reverse the ITC claimed on invoices or debit notes furnished by suppliers in their GSTR 1, when such suppliers have failed to file their GSTR 3B for the respective period before the 30th of September following the end of the financial year.
As taxpayers are well aware, Form GSTR 2A and GSTR 2B are auto-generated ITC statements provided to every normal taxpayer. These statements are based on the information submitted by their suppliers in their respective GSTR-1/IFF.
Both, Form GSTR 2A and GSTR 2B display the filing status of Form GSTR-1/IFF of the suppliers. However, only Form GSTR 2A provides the filing status of Form GSTR 3B of the suppliers. Effective from 1 January 2022, taxpayers can avail ITC only on invoices or debit notes that appear in Form GSTR 2B. Thus, from 1 January 2022, taxpayers must consider GSTR 2B as the primary basis for availing ITC and not GSTR 2A. Since GSTR 2B does not provide the GSTR 3B filing status of suppliers, taxpayers are unaware of this information.
For computation of the ITC reversal, it is possible that the system will use details of GSTR 2A data to identify defaulters. This mechanism could spark debate since the return used by the taxpayer for ITC availment and the return used by the system for computing ITC reversal are completely different and do not depict proper information.
The advisory only mentions that the ITC reversal amount has been “computed from system”, without any clarity on the basis of computing such amount. Additionally, such computation has been undertaken to facilitate the taxpayers. This gives the impression and admits that a clear basis is not available to the taxpayers for determining the reversal amount and therefore, the facility has been provided by way of email communication. The advisory is unclear about the basis of the computation that has been communicated to the taxpayers and may raise doubts about it being an arbitrary computation.
Will the system also compute the reclaimable ITC amount and intimate to taxpayers after the suppliers have paid the tax?
Given that the computation of ITC to be reversed under Rule 37A by the system is to facilitate the taxpayers in complying with Section 41 read with Rule 37A, such facilitation would remain incomplete if the system does not calculate the reclaimable ITC after defaulted suppliers settle their tax dues for the goods or services on which the ITC availed was reversed by the taxpayer. No clarity with respect to the documentary basis for re-availment of ITC or mechanism for re-availment of the ITC post checking with the defaulted suppliers has been provided as on date. The taxpayers are yet to see whether any similar facilitation will be provided by GSTN for re-availment of the ITC reversed.
On one hand, the reversal mandated under Section 41(2) read with Rule 37A places an additional burden on taxpayers for the default of his suppliers, which is unjust and contradictory to various legal principles and on the other hand, the advisory issued communicating reversal of such ITC appears to be ambiguous, putting the taxpayers in dark relating to such reversals.
This calls for a swift release of detailed guidelines that adequately address the above-mentioned issues so that the taxpayers are at comfort in following the mandates provided under GST Law relating to reversal of ITC and re-availment thereof.
[The first and second authors are Associate Partners while the third author is an Associate, in the Indirect Tax practice at Lakshmikumaran & Sridharan Attorneys, Bengaluru]
[1] Notification No. 18/2022-Central Tax dated 28.09.2022
[2] Notification No. 26/2022-Central Tax dated 26.12.2022
