Clarifying Input Tax Credit Claims under New GST Rules

Since its implementation in 2016, GST laws have been kept on changing. In recent times a lot of big amends have been done to simplify GST for taxpayers. To add to the list is the latest GST circular released by Central Board of Indirect Taxes and Customs (CBIC), which is here to end confusion over new Input Tax Credit(ITC) rules. CBIC’s new circular has thrown light on some relevant issues such as the calculation of 20% amount over and above the eligible amount of ITC, cut-off dates and where the new rule will not be applicable.  

The latest circular issued by CBIC has clarified the confusion about 20% cap on ITC claims, providing a big relief to GST taxpayers. The new rules related to availing ITC under the GST clarified that a certain category of Input Tax Credit claims such as ITC in respect of the IGST paid on imports and GST paid under the reverse charge mechanism have been opted out of the realm of the new rules introduced in October 2019.  

The clarification was made regarding the rules which were implemented by the CBIC limiting the ITC claims to 20% of the eligible amount where invoice matching has already been done. Nevertheless, the notification issued by the CBIC in the second week of October left a lot of ambiguity over the method of calculating this 20% amount, the cut-off date as well as whether it was to be calculated supplier-wise or on a consolidated basis. But now, the new circular has cleared up all the doubts related to these aspects for the benefit of GST payers. 

Let’s throw some light on the clarifications made by the CBIC. First of all, this 20% cap on the eligible Input Tax Credit will be exempted from calculating as a supplier-wise rather the GST payers will be able to avail the ITC on a consolidated basis. In order to deal with the complaints related to some businesses availing ITC using fake GST invoices, the CBEC,the nodal body responsible for the implementation of indirect taxes in the country, in October 2019 made it a compulsion to match the invoices uploaded by the suppliers in their GSTR1 forms before buyers could avail Input Tax Credit in their GSTR-3 returns. However, at the same time, the buyers were allowed to claim 20% more ITC over and above the eligible amount where the invoice matching was done but the lack of clarity of calculation method created a lot of mayhem among GST payers. 

To understand it better, let’s take an instance: If a buyer is entitled to avail input tax credit of Rs 5 lakh on purchases (inward supplies) made in a month but if his suppliers have only uploaded the correct invoices in respect of supplies of Rs 4 lakh only in the GSTR1 forms uploaded by them, then the buyer can avail ITC of Rs 4 lakh plus 20% of the eligible amount, i.e., Rs 80 thousand. Thus, the buyer could claim a total ITC of Rs 4.8 lakh in the month.

In order to check the problem of misuse of input tax credit system, the CBIC’s latest circular also clarified that the total amount of ITC, even after the addition of 20% input tax credit over and above the eligible amount where invoice matching has been done, cannot exceed the total amount of input tax credit that can be claimed.

For instance, if a buyer is entitled to ITC of Rs 8 lakh on inward supplies and invoice matching is done in case of Rs 7 lakh then as per the 20% cap rule, he is also entitled to avail 20% over and above the eligible amount of Rs 7 lakh, which is 1.4 lakh in this case. However, this can take the total amount of ITC to be availed by him in the month to Rs 8.4 lakh, Rs 40,000 more than the total ITC amount that can be claimed. The new circular has intended to clarify this only, that in any case ITC claims will be restricted to the total amount due.

This was one of the aspects of the new circular, to know more about where the new GST Input Tax Credit rule will not be applicable and to know more new amends every day, stay tuned!