GST: Input Tax Credit Restrictions applicable w.e.f. 01st January 2021

A. Rule 36(4) of Central Goods & Services Tax Rules restricting ITC to 5% of total ITC reflecting in GSTR-2A

• Rule 36(4) of the Central Goods and Services Tax Rules (hereinafter referred as ‘Rules’) has been inserted by notification No.49/2019 Central Tax dated 09.10.2019 with effect from 09.10.2019 under section 164 of the Act, which restricts the credit relating to the invoices not uploaded by the suppliers in their form GSTR-1 to the extent of 20% (10% w.e.f. 01.01.2020) of such credit. Further w.e.f. 01.01.2021, said percentage was further reduced to 5%.
• This implies that if a total of Rs. 100 is reflecting in GSTR-2A for a month, the registered person can take ITC only upto Rs. 105 in its GSTR-3B for that month. This will ensure that ITC of only those invoices is taken where the supplier is a compliant registered entity filing its taxes & returns on a timely basis.

B. CBIC has introduced Rule 86B to be applicable from 01st January 2021 which restricts the use of input tax credit for discharging GST liability to 99%

• This rule is applicable on the registered person whose value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees. This limit is not be checked with respect to preceding financial year but for each month for which return is being filed. Therefore, in cases wherein turnover of taxable supply would be less than 50 Lakh then this restriction would not be applicable and supposedly in subsequent month, if the turnover exceeds 50 Lakh, then restriction would have to be checked.

• Exceptions to this rule:

1. Payment of Income Tax of more than one lakh rupees- Rule 86B would not be applicable in cases wherein the persons mentioned below have deposited amount of more than one lakh rupees as income tax under the Income-tax Act, 1961–

• The said registered person or
• The proprietor or karta or the managing director of the registered person or
• Any of the two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees of the registered person, as the case may be,

The eligibility check would be made in each of the last two financial years for which the time limit to file return of income under subsection (1) of section 139 of the said Act has expired.

2. Refund of ITC towards Zero Rated Supplies of Goods or services or both- Rule 86B would not be applicable in cases wherein registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (i) of first proviso of subsection (3) of section 54 i.e. zero rated supplies made without payment of tax. 

3. Refund of Input Tax Credit due to Inverted Duty Structure- Rule 86B would not be applicable in cases wherein the registered person has received a refund amount of more than one lakh rupees in the preceding financial year on account of unutilised input tax credit under clause (ii) of first proviso of subsection (3) of section 54 i.e. Inverted duty structure.

4. Cumulative discharge of tax liability of more than 1% during the financial year- Restriction in Rule 86B is not applicable wherein cumulatively upto the said month in the current financial year registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability. Therefore, while filing return for each month, taxpayer now has to keep a track that whether his cumulative discharge of tax liability of output tax through electronic cash ledger is more than 1% upto the month of filing of return.

5. Specified Registered persons-Restriction under Rule 86B is not applicable in cases wherein the registered person is

Government Department; or

a Public Sector Undertaking; or

a local authority;or

a statutory body.

The introduction of these new rules has made the entire process of preparing & filing the GST returns more cumbersome for a certain category of large taxpayers & has also opened a plethora of continued litigation & judicial interventions. The small & medium registered persons have been kept outside its ambit which is a welcome move & does not in any way burden the MSME taxpayers.