GST Input Tax Credit Changes Cut Both Ways
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22-Feb-2022

Changes proposed to input tax credit provision in the GST law are good in intent but may be harsh for recipients, said experts regarding the Finance Bill 2022.

Businesses pay a tax on inputs. And they get credit for it to be deducted from the tax on the output. That's aimed at avoiding double taxation and ensuring that the tax is paid only on the value added.

The ITC regime in India has seen several changes in the past years as automatic invoice matching remains to be implemented. This has often led to excess ITC being claimed at one stage versus tax paid at earlier stages in the supply chain. It also led to ITC-related frauds.

The government is trying to develop an automated compliance system and in effect, trying to improve the overall compliance culture, Harpreet Singh, indirect tax partner, at KPMG India, told BloombergQuint. While it's moving in the right direction, implementation may become a little challenging, he said. 

On the one hand, the government is encouraging compliant taxpayers to urge their vendors to comply with the law. But some of these changes necessitate them to keep a close track on their vendors' compliance, which may not be very practical.

Harpreet Singh, Indirect Tax Partner, at KPMG India Pvt.

Here are the top changes on utilisation of input tax credit in the Finance Bill, 2022: 

  • Extension of due date for availing ITC.
  • Introducing auto-generated statement and inserting additional conditions to claim tax credit. 
  • Taxpayers cannot claim provisional ITC anymore.
  • Levy of interest only when ITC is wrongly utilised.

Time Limit Extended

The date for availing input tax credit for the previous financial year has been extended till Nov. 30 from Sept. 30.

Additional time has been provided to reconcile and identify the missed credit and follow-up with the vendors for compliance so that the tax credit can be availed, Krishan Arora, partner at Grant Thornton LLP, said.


Claiming ITC

Earlier, input tax credit could be availed only by way of a two-way communication between the supplier and the recipient.

On Jan. 1, 2022, a change was introduced to replace the two-way communication with an auto-generated statement, which is produced by the GST portal, based on the supplier's details of goods supplied. The auto-generated statement reveals details of input tax credit that can be claimed by the recipient. 

The Finance Bill 2022 amended the provision to say that ITC can be availed only if it has not been specifically restricted in the auto-generated statement. The proposal also lists conditions due to which ITC may be restricted. For instance, if supplies have been taken from an entity that has defaulted in payment of tax or if it has availed excess ITC.

Experts told BloombergQuint that while these measures have been introduced to tackle issues like fake invoices and tax evasion, they are impractical since buyers have no means to find out if the seller entity is in violation of these conditions. 


"Earlier, if my vendor has filed her returns, I could look at those details in the GST portal and claim my tax credit," Singh pointed out. That's no longer going to be the case. 

Now, I can claim the tax credit only when my supplier has deposited money in the government's exchequer. If my vendor goes bankrupt, I cannot avail the tax credit.

Harpreet Singh, Indirect Tax Partner, KPMG India 

"Input tax credit cannot be availed if my vendors avail of any wrongful tax credit," he said. 


No More Claiming ITC On Provisional Basis 

The GST law allows taxpayers to claim provisional input tax credit. Provisional ITC is claimed by buyers for invoices that are yet to be reported by the sellers. 

The government seeks to substitute this by allowing businesses to avail input credit only on the basis of the auto-generated statement.

In effect, the legislature is trying to rationalise the manner of claiming credit, Charanya Lakshmikumaran, partner at Lakshmikumaran & Sridharan Attorneys, said. This amendment may end up in courts as it casts an additional onus on the recipients, she added. 

In case suppliers don't pay the amount on which credit has been availed, then the recipient will be liable to reverse the credit along with interest, Lakshmikumaran explained. 

The aspect of interest liability is likely to be a subject matter of litigation. It does cast additional burden on recipients to check whether their suppliers are paying tax correctly and timely.

Charanya Lakshmikumaran, Partner, Lakshmikumaran & Sridharan Attorneys

Availing And Utilisation Of Excess ITC Different 

The CGST Act provides for levy of interest on excess input tax credit claimed. But the provision does not create any distinction between 'ITC availed' and 'ITC utilised'. Or, at least, it appeared so. 

Experts BloombergQuint spoke with said there is a difference between the two. Availing the tax credit is when taxpayers show that they are eligible for a tax credit. Utilisation is when they actually use the credit against their tax liability in the returns filed. 

Due to the lack of clarity in the provision, several taxpayers had approached courts challenging the tax department's move to penalise the excess ITC availed. 

The Finance Bill offers some relief on this front.

The amendment proposes to clarify that interest would be attracted only if excess ITC is utilised against payment of output liabilities. So, there will be no penalty if tax credit is only wrongly availed and retained in the electronic credit ledger. The amendment will have retrospective effect from July 1, 2017.

The amendment is in line with several judgments by various high courts. Most recently, the Madras and Patna high courts held that interest will be attracted only in cases where ineligible credit is utilized.

It's a well-appreciated move as it removes ambiguity in the provision, Arora said.

Apart from clarifying the law, this amendment will put an end to the long saga of litigations between the taxpayers and the department with regard to the levy of interest as well as the applicable rate of interest on the excess ITC availed.

Krishan Arora, Indirect Tax Partner, Grant Thorton 

The amendment also aims to cap the rate of interest for wrongly availed ITC at 18%. Earlier, the rate could go up to 24%. 

Bloomberg Quint

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