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Infeasibility Of Implementing Rule 36(4) Of CGST Rules 2017

INDIRECT TAX / CA. HARDIK JIVRAJBHAI KAKADIYA 01 January 2020

Ref: CAAS/Representations/2019-20/04                                               Date: 25/11/2019

 

To,

The Chairman,

Central Board of Indirect Taxes & Custom,

The Ministry of Finance, 

New Delhi - 110001

 

Sub.: Infeasibility of Implementing Rule 36(4) of CGST Rules 2017

 

Dear Sir,

 

Greetings from Chartered Accountants Association Surat. As you are now well aware that our Associations works for ensuring best practices in tax compliances vis-à-vis providing a better working conditions for our members, Chartered Accountants, their staff members and the industry (“the Stakeholders”). Recently, vide Notification No.49/2019 (Central Tax) dt.09/10/2019, CBIC has notified Rule 36(4) of CGST Rules, 2017. As informed, the new rule was implemented to tackle the menace of fake bills from unscrupulous persons. The rule may be for a noble purpose, but has created various technical, professional and practical difficulties for the stakeholders. Kindly find our representation on the subject matter:

  1. Restriction under Rule 36(4) does not curb problem of fake billing

Rule 36(4) restricts the availment of ITC in respect of invoices not uploaded by corresponding supplier to maximum of 20% of the eligible ITC reflected in the assesse’s GSTR-2A. However, in most of the fake billing cases, vendors regularly file GSTR-1 and avoid filing GSTR-3B, since filing 3B requires payment of Taxes u/s 39(7) or adjustment of available ITC, whereas filing GSTR-1 only require guts. So, even if conditions mandated by Rule 36(4) are made applicable on all the tax payers (including fake billers), there is no way to stop fake billing, except with manual intervention by the local GST officers, who only can pull out fake billers on the basis of behavioral patterns, which was possible even without implementing Rule 36(4). Hence, just to flag fake billers, all the registered persons should not put to substantial hardship.

 

  1. Awkward situation for Quarterly filers:

With the implementation of Rule 36(4), Quarterly filers of GSTR-1 are put in an awkward situation, since they are not able to upload outward supply anytime before the end of the relevant quarter. Since, not able to upload outward supplies, their customers GSTR-2A do not get populated and thus as a result the customers/clients do not get the requisite credit as mandated under the new 20% ITC regime.

 

  1. Rule 36(4) cannot override Sec.16(1) (2), Sec.41, Sec.43A:

Sec.16(1) of CGST Act states as follows:

“Sec. 16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.”

Sec.16(2) of CGST Act deals with eligibility and conditions for taking input tax credit and states as follows:

“Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,

  1. he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
  2. he has received the goods or services or both.
  3. subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
  4. he has furnished the return under section 39:”

Section 16(1) empowers to prescribe conditions and restrictions for entitlement of input tax credit. If it is considered that rule 36(4) has been issued based on powers conferred by section 16(1), then also it cannot be considered as aligned with section 16(1). As section 16(1) only empowers to prescribe conditions for availment of ITC. The availment of Input Tax credit is done in the books of accounts of the assessee on the date of receipt of supply and invoice. There is no power vested in section 16(1) to put restrictions post entitlement of input tax credit. 

 

Further section 16(2) lays down the vital cumulative conditions to be satisfied for availment of ITC. There is no mention in Sec.16(2) of CGST Act, that ITC shall not be available if return for Outward supply i.e. GSTR-1 is not filed. Thus, Rule 36(4) is not in line with Sec. 16(2) and is more of an ultra-vires the Act.

 

Further, the Government is empowered to make rule 36 only under the provision of Section 43A of the CGST Act, 2017. But, however section 43A has not been yet notified by the Government and it is expected to come into effect w.e.f. 01/04/2020 only. It is pertinent to note that while the empowering section is not yet in operation, how is it possible for any rule to be notified thereunder at a date earlier than the effect of the parent section. The department needs to seriously review the implementation of the new rules.

 

  1. Substantial increase in Compliance Workload to businesses:

Since last 2 years, the GST compliance procedures had evolved using GSTR-1, 2A and 3B to a fairly stable mechanism. However, GSTR-2A was only for reference purpose and was used half-yearly or annually by majority of registered persons to periodically match the mismatch credits on a voluntary basis. However, new rule 36(4) mandates, match-mismatch every month and that too in a very short time frame of 9 days (i.e. from dates 12th to 20th) which leaves very few days for filing of GSTR-3B of and that too very close to the due date. As per your recent official tweet by GST Tech proudly boasting of the return filing patterns as follows:

The above statistics tweeted does not give a good picture, but are highly gloomy and sad pictures of how registered persons, just for sake of complying are toiling day and night. The picture also raises question, as why there has arisen a need for registered persons, to be awake sleepless late night or wake up early morning. The straight answer is the denial of service by GSTN to users above 150000, a common message showing to majority of the registered users. Further, an official tweet by GST Tech requests as follows:

The above tweet, requests the registered persons to avoid last minute filing. But, it is unfortunate, that if operation of Rule 36(4) continues, it would not be possible for registered persons to comply within such short time and such last day web traffic surges would continue, even if registered person employs double his accounting staff. It is to be noted, that the existing GST law is already consuming time, and with the implementation of Rule 36(4), even more time resource would get locked. And it is rightly said, money can buy anything, but not more time. 

 

  1. Impractical to comply the restriction of Rule 36(4):

As stated in the Circular No.123/42/2019   dt. 11.11.2019, GSTR-2A is a dynamic document. There is no mechanism provided by GSTN wherein the assessee can keep track of updation being made in GSTR-2A.  For example, if the corresponding suppliers delays in filing of GSTR-1 for the month of November’2019, suppose he files November’2019 GSTR-1 in Feburary’2020. Then the invoice issued by the corresponding supplier shall be updated in assesse’s November’2019 GSTR-2A only. Thus, it is practically every time not possible to track the updation of GSTR-2A for past periods also. 

 

We hope the above representation would have enlightened your good self in appraising the adverse situation faced by the stakeholders, and inspired your good self to take some remedial action in the aforesaid matter at the earliest on priority.

 

Thanks & Regards,

For Chartered Accountants Association, Surat.

 

 

Chairman – Indirect Tax Committee   |  Secretary

Copy to: -

  1. Finance Minister, 

Ministry of Finance,

134, North Block, New Delhi – 110011.

 

  1. Secretary (Revenue), 

128/A, North Block, New Delhi – 110001

 

  1. GST Council Secretariat, 

Tower II, 5th Floor, Jeevan Bharti Building, New Delhi – 110001

Ref: CAAS/Representations/2019-20/04                                               Date: 25/11/2019

 

To,

The Chairman,

Central Board of Indirect Taxes & Custom,

The Ministry of Finance, 

New Delhi - 110001

 

Sub.: Infeasibility of Implementing Rule 36(4) of CGST Rules 2017

 

Dear Sir,

 

Greetings from Chartered Accountants Association Surat. As you are now well aware that our Associations works for ensuring best practices in tax compliances vis-à-vis providing a better working conditions for our members, Chartered Accountants, their staff members and the industry (“the Stakeholders”). Recently, vide Notification No.49/2019 (Central Tax) dt.09/10/2019, CBIC has notified Rule 36(4) of CGST Rules, 2017. As informed, the new rule was implemented to tackle the menace of fake bills from unscrupulous persons. The rule may be for a noble purpose, but has created various technical, professional and practical difficulties for the stakeholders. Kindly find our representation on the subject matter:

  1. Restriction under Rule 36(4) does not curb problem of fake billing

Rule 36(4) restricts the availment of ITC in respect of invoices not uploaded by corresponding supplier to maximum of 20% of the eligible ITC reflected in the assesse’s GSTR-2A. However, in most of the fake billing cases, vendors regularly file GSTR-1 and avoid filing GSTR-3B, since filing 3B requires payment of Taxes u/s 39(7) or adjustment of available ITC, whereas filing GSTR-1 only require guts. So, even if conditions mandated by Rule 36(4) are made applicable on all the tax payers (including fake billers), there is no way to stop fake billing, except with manual intervention by the local GST officers, who only can pull out fake billers on the basis of behavioral patterns, which was possible even without implementing Rule 36(4). Hence, just to flag fake billers, all the registered persons should not put to substantial hardship.

 

  1. Awkward situation for Quarterly filers:

With the implementation of Rule 36(4), Quarterly filers of GSTR-1 are put in an awkward situation, since they are not able to upload outward supply anytime before the end of the relevant quarter. Since, not able to upload outward supplies, their customers GSTR-2A do not get populated and thus as a result the customers/clients do not get the requisite credit as mandated under the new 20% ITC regime.

 

  1. Rule 36(4) cannot override Sec.16(1) (2), Sec.41, Sec.43A:

Sec.16(1) of CGST Act states as follows:

“Sec. 16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.”

Sec.16(2) of CGST Act deals with eligibility and conditions for taking input tax credit and states as follows:

“Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,

  1. he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
  2. he has received the goods or services or both.
  3. subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
  4. he has furnished the return under section 39:”

Section 16(1) empowers to prescribe conditions and restrictions for entitlement of input tax credit. If it is considered that rule 36(4) has been issued based on powers conferred by section 16(1), then also it cannot be considered as aligned with section 16(1). As section 16(1) only empowers to prescribe conditions for availment of ITC. The availment of Input Tax credit is done in the books of accounts of the assessee on the date of receipt of supply and invoice. There is no power vested in section 16(1) to put restrictions post entitlement of input tax credit. 

 

Further section 16(2) lays down the vital cumulative conditions to be satisfied for availment of ITC. There is no mention in Sec.16(2) of CGST Act, that ITC shall not be available if return for Outward supply i.e. GSTR-1 is not filed. Thus, Rule 36(4) is not in line with Sec. 16(2) and is more of an ultra-vires the Act.

 

Further, the Government is empowered to make rule 36 only under the provision of Section 43A of the CGST Act, 2017. But, however section 43A has not been yet notified by the Government and it is expected to come into effect w.e.f. 01/04/2020 only. It is pertinent to note that while the empowering section is not yet in operation, how is it possible for any rule to be notified thereunder at a date earlier than the effect of the parent section. The department needs to seriously review the implementation of the new rules.

 

  1. Substantial increase in Compliance Workload to businesses:

Since last 2 years, the GST compliance procedures had evolved using GSTR-1, 2A and 3B to a fairly stable mechanism. However, GSTR-2A was only for reference purpose and was used half-yearly or annually by majority of registered persons to periodically match the mismatch credits on a voluntary basis. However, new rule 36(4) mandates, match-mismatch every month and that too in a very short time frame of 9 days (i.e. from dates 12th to 20th) which leaves very few days for filing of GSTR-3B of and that too very close to the due date. As per your recent official tweet by GST Tech proudly boasting of the return filing patterns as follows:

The above statistics tweeted does not give a good picture, but are highly gloomy and sad pictures of how registered persons, just for sake of complying are toiling day and night. The picture also raises question, as why there has arisen a need for registered persons, to be awake sleepless late night or wake up early morning. The straight answer is the denial of service by GSTN to users above 150000, a common message showing to majority of the registered users. Further, an official tweet by GST Tech requests as follows:

The above tweet, requests the registered persons to avoid last minute filing. But, it is unfortunate, that if operation of Rule 36(4) continues, it would not be possible for registered persons to comply within such short time and such last day web traffic surges would continue, even if registered person employs double his accounting staff. It is to be noted, that the existing GST law is already consuming time, and with the implementation of Rule 36(4), even more time resource would get locked. And it is rightly said, money can buy anything, but not more time. 

 

  1. Impractical to comply the restriction of Rule 36(4):

As stated in the Circular No.123/42/2019   dt. 11.11.2019, GSTR-2A is a dynamic document. There is no mechanism provided by GSTN wherein the assessee can keep track of updation being made in GSTR-2A.  For example, if the corresponding suppliers delays in filing of GSTR-1 for the month of November’2019, suppose he files November’2019 GSTR-1 in Feburary’2020. Then the invoice issued by the corresponding supplier shall be updated in assesse’s November’2019 GSTR-2A only. Thus, it is practically every time not possible to track the updation of GSTR-2A for past periods also. 

 

We hope the above representation would have enlightened your good self in appraising the adverse situation faced by the stakeholders, and inspired your good self to take some remedial action in the aforesaid matter at the earliest on priority.

 

Thanks & Regards,

For Chartered Accountants Association, Surat.

 

 

Chairman – Indirect Tax Committee   |  Secretary

Copy to: -

  1. Finance Minister, 

Ministry of Finance,

134, North Block, New Delhi – 110011.

 

  1. Secretary (Revenue), 

128/A, North Block, New Delhi – 110001

 

  1. GST Council Secretariat, 

Tower II, 5th Floor, Jeevan Bharti Building, New Delhi – 110001


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