Input Tax Credit Reversal


The Finance Act, 2022 substituted Section 41 of the Central Goods and Services Tax Act, 2017 (CGST Act), with effect from 1-10-2022.1

Thus, from 1-10-2022, a taxpayer is allowed to self-assess and claim input tax credit (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 reclaimed by taxpayers upon payment of the tax by the respective suppliers for the supplies concerned.

The 48thGST Council meeting held on 17-12-2022 recommended the introduction of Rule 37-A2 into the Central Goods and Services Tax Rules, 2017 (CGST Rules). This rule delineates the manner for ITC reversal and credit to be reclaimed in terms of Section 41.

GSTN Advisory

Recently, the Goods and Services Tax Network (GSTN) issued an advisory titled “ITC Reversal on Account of Rule 37-A” dated 14-11-2023, wherein it was informed that the system has calculated the amount of ITC required to be reversed under Rule 37-A for Financial Year 2022-2023 and the same has been communicated to taxpayers via e-mail.

The advisory emphasised 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 37-A?

As per the advisory, it appears that the ITC to be reversed under Rule 37-A has been computed for the entire of Financial Year 2022-2023. 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 1-10-2022 and the mechanism to reverse the said ITC was introduced by way of Rule 37-A with effect from 26-12-2022.

Since for the period prior to 26-12-2022, there was no mechanism prescribed for reversal of ITC, the amount of ITC to be reversed for Financial Year 2022-2023 should ideally be calculated from the period post 26-12-2022. Here, it may be contended that the provision mandating such reversal was implemented from 1-10-2022. Therefore, even if such contention is considered, the period for reversal of ITC should be computed from 1-10-2022 and not for the entire Financial Year 2022-2023. As the advisory has not specifically mentioned the period for computing the ITC reversal amount and it only mentions Financial Year 2022-2023, clarity regarding the period is awaited. It is advisable that the taxpayers look into the ITC amount communicated for reversal via e-mail and check the period that has been considered for computing the ITC. With respect to any ITC pertaining to the period prior to 26-12-2022, clarification may be sought by the taxpayers, since the mechanism for reversal prior to 26-12-2022 was not available under GST law. In appropriate cases, challenge to such mails for reversal for the entire period of Financial Year 2022-2023 may also be contemplated exercising writ jurisdiction of the 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 30thof September following the end of the financial year.

As taxpayers are aware, Forms 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, Forms 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 1-1-2022, taxpayers can avail ITC only on invoices or debit notes that appear in Form GSTR-2B. Thus, from 1-1-2022, 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 based on 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 e-mail 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 37-A by the system is to facilitate the taxpayers in complying with Section 41 read with Rule 37-A, 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 reavailment of ITC or mechanism for reavailment 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 reavailment of the ITC reversed.

On one hand, the reversal mandated under Section 41(2) read with Rule 37-A 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 abovementioned issues so that the taxpayers are at comfort in following the mandates provided under GST law relating to reversal of ITC and reavailment thereof.

*Associate Partner, Lakshmikumaran Sridharan Attorneys

**Associate Partner, Lakshmikumaran Sridharan Attorneys

***Associate, Lakshmikumaran Sridharan Attorneys

1. Ministry of Finance, Department of Revenue, Notification No. 18/2022-Central Tax dated 28-9-2022.

2. Ministry of Finance, Department of Revenue, Notification No. 26/2022-Central Tax dated 26-12-2022.

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