SUBSTITUTION OF SECTION 38 OF THE CGST ACT AND THE INTRICACIES EMBEDDED THEREIN

Although it can be seen that the proposed substitution of Section 38 is coupled with multiple areas of concern, it is anticipated that some clarity will be obtained once the amendment is made effective and the relevant rules are prescribed

The Finance Bill, 2022 as introduced on 1.2.2022 has proposed to amend various provisions of the Central Goods and Services Tax Act, 2017 ("CGST Act"). Whilst majority of the amendments relate to availment of input tax credit ("ITC") and return filing mechanism, the substitution of Section 38 deals with both the said arenas.

Currently, Section 38 provides for furnishing of details of inward supplies. As per the said section, a registered person can verify, modify or delete the details furnished by his suppliers in GSTR-1 to prepare the details of his inward supplies. It further allows the recipient to upload the details of inward supplies not declared by the suppliers in GSTR-1 and provides for matching of the details so furnished in terms of Sections 42 and 43.

Even though the said provision has been in force since 1.7.2017, the same has never been implemented due to limited functionality of the GST portal. Thus, it would not be incorrect to say that Section 38 has so far remained redundant.

Section 38 as substituted vide the Finance Bill, 2022

Sub-section (1) of the substituted Section 38 provides that the details of outward supplies furnished in GSTR-1 by the suppliers, other prescribed supplies and ITC shall be made available electronically to the recipients by way of an auto-generated statement subject to prescribed conditions and restrictions.

With the insertion of sub-section (1), an enabling provision for GSTR-2B has been incorporated. The said sub-section read with Rule 36(4) of the Central Goods and Service Tax Rules, 2017 ("CGST Rules"), as amended w.e.f. 1.1.2022, puts the year-long dispute regarding availment of ITC on the basis of GSTR-2A or GSTR-2B to rest.

Further, Clause (a) of sub-section (2) specifies that the auto-generated statement shall consist of details of available ITC. On the contrary, as per Clause (b) of sub-section (2), the details of ITC not available will be communicated.

Apparently, the proposed substitution of Section 38 is a step in the right direction however, the same has its own set of complexities. This is essentially discernible from perusal of Clause (b) sub-section (2) of the substituted Section 38.

The said clause states that GSTR-2B shall consist of details of supplies in respect of which ITC cannot be availed, whether wholly or partly, by the recipients on account of details furnished in GSTR-1 by various categories of registered persons (i.e., the suppliers).

Before delving into the aforementioned categories of registered persons, the primary question that comes up is whether the restriction of ITC as envisaged under Clause (b) of Section 38(2) is qua the supplier or qua a particular supply received by the recipient. On a plain reading of the said clause, it can be observed that the restriction would be applicable in respect of all supplies received from the supplier who is in-default instead of a particular supply.

However, this leads to another incongruity which stems from the use of the words 'wholly or partly'. If the intention of the Government is to identify suppliers in default and to deny ITC in respect of supplies received from them, then the point to ponder upon is how the partial ITC will be allowed and communicated to the recipients.

Here, another issue comes to the light. Section 38(2)(b) seeks to restrict availment of ITC itself. The corresponding amendment is also made under Section 16(2) of the CGST Act wherein it is proposed to insert Clause (ba) to restrict availment of ITC in cases where the same is communicated as not available under Section 38(2)(b). The issue in this case is whether the communication under Section 38(2)(b) will be made to the concerned recipients in the same month in which the relevant supply is procured by them or not. In case the communication is made in the subsequent months, then invariably the recipient would have already availed the ITC. Therefore, the restriction of availment of ITC in such a case will lose its relevance.

Having highlighted the preliminary issues surrounding Section 38(2), let us now discuss the category of suppliers who are sought to be covered under Clause (b) of the aforesaid provision:

a) Supplies made by registered persons within a prescribed period of taking registration

It appears that the Government intends to restrict ITC in respect of supplies made by newly registered taxpayers in order to curb fraudulent cases and sham transactions. While this might reduce the cases of tax evasion, it is needless to say that this will also cause undue hardship for bonafide taxpayers. Further, it would have to be seen whether ITC can be availed by the recipient once the prescribed period ends.

b) Suppliers who have defaulted in payment of tax and such default continues for the prescribed period

Here, a question emerges as to whether the default envisaged under this category would cover non-filing of GSTR-3B and consequential non-payment of tax or even partial non-payment of tax. Furthermore, in case partial non-payment of tax is also covered, then the provisions of Section 16(2)(c) as well as Section 41 will also call for an examination.

c) Suppliers who have paid lesser GST vis-à-vis the GST amount reported in GSTR-1 during the prescribed period and such difference is beyond the prescribed limit

Currently, Rule 21(2A) of the CGST Rules provides for suspension of registration in cases where there are significant anomalies or differences between GSTR-3B and GSTR-1 furnished by taxpayers. Thus, it appears that suppliers whose registration is to be suspended will get covered in this category. However, the issue is whether ITC can be availed once the differences get resolved or the suppliers rectify the anomalies.

d) Suppliers who have availed higher ITC vis-à-vis the ITC that can be availed as per GSTR-2B and such excess is beyond the prescribed limit

The registered persons avail ITC in respect of tax paid under reverse charge mechanism as well as import of goods and services. The said details of ITC are not getting communicated to such persons in GSTR-2B or are being partially communicated (such as supplies received from unregistered persons, etc.). The difficulty in this case will arise if the availment of ITC in respect of aforesaid supplies is also deemed as excess availment.

e) Suppliers who have defaulted in discharging GST liability in accordance with Section 49(12) i.e., default in discharging minimum proportion of liability through cash

The point worth noting in this case is whether ITC in respect of all the supplies made by the defaulting supplier will be restricted or only such ITC will be restricted which pertains to supplies on which tax has not been discharged through cash. However, this will further aggravate the problem since, one to one correlation between liability and corresponding payment is not possible as everything gets credited or debited to a common pool.

f) Other prescribed class of persons

The Government has also been given the power to prescribe additional category of suppliers other than those covered above.

Although it can be seen that the proposed substitution of Section 38 is coupled with multiple areas of concern, it is anticipated that some clarity will be obtained once the amendment is made effective and the relevant rules are prescribed.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.