ITC under GST – You've been matched!

ITC under GST – You've been matched!

The much-debated concept of 'matching' under GST has finally found its place in the Act! Tax professionals and assesses alike have time and again, from the erstwhile VAT laws encountered the question as to whether matching of invoices issued by a supplier and received by a recipient can be a pre-condition to availment of credit.

To take a walk down memory lane, one cannot overlook the time when the concept of matching tested the waters of GST through the notorious Rule 36(4) of the Central Goods and Services Tax Rules, 2017 (CGST Rules) which permitted a recipient to only avail 20% (now 5%) of the total matched input tax credit.

In other words, this Rule brought in an inherent requirement for tax payers to match their credits availed with the details of invoices which have been uploaded by suppliers in their statement of outward supplies (Form GSTR 1). If suppliers failed to upload certain invoices due to which the details of the same were unavailable with the recipient in their Form GSTR 2A/2B, Rule 36(4) limited availment of such credits only to the extent of a certain percentage of the total matched credit.

At this stage, it is pertinent to note that this requirement was encompassed only within the delegated legislation, i.e., the Rules and thus, it left an area of doubt as to whether such a matching requirement was contemplated by the parent Act in the first place.

The Union Budget 2021-22 has sought to put matters to rest.

A significant amendment has sought to be introduced to Section 16 of the Goods and Services Tax Act, 2017 (CGST Act) vide The Finance Bill, 2021.

A new sub-clause (aa) has been included as an additional condition which must be necessarily fulfilled for a recipient to avail input tax credit in respect of any of their procurements.

In Section 16, after clause (a) which requires the recipient to be in possession of a tax invoice or debit note issued by a supplier to avail input tax credit, the following condition has been sought to be inserted by the Finance Bill:-

"(aa) 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;".

The effect of the above amendment is that a recipient would be eligible to avail input tax credit only after the supplier furnishes details of the supply made in their statement of outward supplies, i.e., Form GSTR -1 and consequently, such details are mirrored in Form GSTR -2A/2B for the recipient.

The Memorandum explaining the provisions in the Finance Bill, 2021 describes the scope of the amendment in the following manner:-

A new clause (aa) to sub-section (2) of the section 16 of the CGST Act is being inserted to provide that input tax credit on invoice or debit note may be availed only when the details of such 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.

Therefore, it is clear that the legislature intends to mandate matching of invoices as a pre-condition for availment of input tax credit.

Thus, once the amendment is notified, recipients will not be eligible to avail input tax credit on those supplies which are not reflecting in their Form GSTR -2A/2B on account of any indolence on the part of the suppliers.

In essence, after the amendment is notified, a recipient would have to possess invoices, the details of the invoices should be reflecting in their Form GSTR 2A/2B, the goods or services should have actually been received by the recipient and the supplier should have actually paid the tax by way of filing his returns, apart from fulfilling few other conditions detailed in Section 16.

This change leaves us with an array of questions unanswered.

• Will this amendment apply retrospectively?

• What about the fate of Rule 36(4)?

• Will the Rule continue to survive and provide for a cushion of availing 5% of the total matched credit even though the Act mandates a 100% matching requirement?

• Has this once looked down upon Rule, acquired the position of the better half? Is Rule 36(4) more beneficial vis-à-vis the sought to be amended Section 16?

• If sub-clause (aa) to Section 16 is the parent provision that imbibes the concept of matching, where does the power to create Rule 36(4) flow from? Is the Rule truly not backed by a parent provision in the CGST Act?

• Or does Rule 36(4) and the newly introduced amendment operate in different fields altogether, the former for provisional credits and the latter for final credits?

With such open-ended issues afloat, it would be of immense assistance if the Government issues clarifications to address the same and to put any lingering doubts to rest, prior to notifying the changes. This will be beneficial for all stakeholders involved as it will provide certainty in implementation of the provision and mitigate litigation.

That said, the Authors of this article take your leave, parting with some food for thought.