On March 24, the Finance Minister announced a bouquet of relaxations under GST for taxpayers due to the impact of Covid-19. These revolved around extending the due date for filing their returns, reducing the rate of interest, waiving of late fee and generally assuring taxpayers that what they have to do in April, May and June could be done by June.

On April 2, the Central Board of Indirect Taxes and Customs ( CBIC) issued a bunch of Notifications implementing the relaxations announced by the Finance Minister. In doing so, they have also added in a bit of their own generosity by deferring the restrictions on credit imposed by Rule 36(4) of the CGST Rules.

Rule 36(4)

Rule 36(4) made its entry on October 9, 2019, and read “Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 20 per cent of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37.”

On December 26, 2019, 20 per cent was amended to 10 per cent. For instance, if the eligible tax credit is ₹1,00,000 but invoices worth only ₹80,000 have been uploaded by the counter-parties, eligible input tax credit for that month would be ₹88,000 (₹80,000 + 10 per cent of ₹80,000). The balance would be claimed as and when the invoices that weren’t uploaded are uploaded. Notification No 36/2020 issued on April 3 clarifies that the cumulative impact of Rule 36(4) for six months from February 2020 would be adjusted in the GST return of September 2020.

While the intention of the CBIC to provide every sort of relaxation to the beleaguered taxpayer in these difficult times is laudable, the necessity of forcing him to take a hit of six months in a single month would be counter-productive. Rule 36(4) is being challenged on the grounds that GST laws cannot bring in monetary limits to input tax credit — at best they can impose non-monetary conditions to test their eligibility.

Arbitrary limit

The 10 per cent limit is arbitrary and is being challenged at High Courts. Since the due dates for filing of returns have been extended to June 30, it is possible that many taxpayers would choose to file their returns on that date. In case there is an extension, they would choose that extension. Hence it is possible that at the time of filing the GST return for September 2020, the amount of credit that is not eligible due to the mathematical permutations and combinations imposed by Rule 36(4) could be quite high.

Taxpayers would need to take the entire hit in one month’s return which may not be what the government intended. Taxpayers would want the ineligible credit to be spread over six months till March 2021. Ideally, the CBIC should state that Rule 36(4) would not be a part of the statute book till September 2020. If the new system of returns and e-invoices are introduced from October 2020 as has been promised, Rule 36(4) will not be required at all. The new system of returns has been designed in such a way that, if all goes well, the chances of there being an invoice that has neither been accepted, rejected or kept pending are small. However, with GST revenues already dipping and expected to dip further, one cannot expect too many changes to the GST Rules in the next few months. Artificial restrictions such as the one imposed by Rule 36(4) are bound to continue.

The writer is a chartered accountant

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