Application of Section 16(4) to ITC in GSTR-3B of a particular month filed after due date for filing GSTR-3B of September of next Financial Year

[Shripada Hegde]

It has been almost been 5 years since the implementation of GST and the litigations in GST are now in full swing. Department has been issuing notices on various issues one of which is time limit for availing credit under Section 16(4). One of the scenarios for which credit is being denied is the late filing of a particular return. For example filing of GSTR-3B for any period pertaining to FY 2017-18 on a date after the due date for filing return for September 2018. In such scenarios, entire ITC availed in the return is proposed to be denied by applying Section 16(4). This article tries to put forth some basis on which such a notice can be countered.

The entire issue in my view revolves around ‘what constitutes availment of ITC?’. Section 16(4) of CGST Act, 2017 – of which a contravention is being alleged – speaks about the time limit to avail the credit and not the time limit to utilise the credit. What constitutes availment of credit? – ‘Availment in books of accounts’? or ‘Disclosure in returns’? – is something which is to be looked into very carefully.

The notices issued by the department consider ‘disclosure in GSTR-3B’ as the event which constitutes ‘availment of ITC’. It is because the notices consider ‘disclosure in GSTR-3B’ as ‘availment of ITC’ they allege contravention of Section 16(4) when such disclosure if beyond the due date to file return of September of next year.  However, the notices doesn’t put forth any legal ground based on which ‘disclosure in return’ is treated as ‘availment of ITC’.

What constitutes availment or taking of credit has not been prescribed in Section 16(4). However, Section 16(1) reads as under

“(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.”

Hence, from the reading of the above provision, it appears that the credit is to be availed in the manner specified in Section 49. This makes it necessary to look into the provisions of Section 49.

Section 49 of the CGST Act 2017 reads as under

“49. Payment of tax, interest, penalty and other amounts. - (1) Every deposit made towards tax, interest, penalty, fee or any other amount by a person by internet banking or by using credit or debit cards or National Electronic Fund Transfer or Real Time Gross Settlement or by such other mode and subject to such conditions and restrictions as may be prescribed, shall be credited to the electronic cash ledger of such person to be maintained in such manner as may be prescribed.

(2) The input tax credit as self-assessed in the return of a registered person shall be credited to his electronic credit ledger, in accordance with section 41 or section 43A, to be maintained in such manner as may be prescribed.

(3)…………………………….”

As indicated in the heading of Section 49, it deals only with the payment of Tax, Interest, Penalty and Other amounts and not with availment of credit. The provisions contained in the said section also do the same. Sub-Section (2), as reproduced above, states “Input Tax credit as self-assessed in the return of a registered person shall be credited to his electronic credit ledger”. It only speaks about what happens to credit self-assessed in the return of a registered person and doesn’t speak about what constitutes availment of credit. There is no other provision in Section 49 which prescribes the manner of availment. Hence, there is no provision in CGST Act, 2017 which prescribes “what constitutes availment of credit?”.

Further, even if the Section 49(2) is to be understood as the section prescribing the manner in which credit is to be availed, it is ambiguous. Said Section 49(2) mentions of ‘credit self assessed in the return’. Which return? It doesn’t put forth. Further, Section 2(97) which defines the term “return” to be “any return prescribed or otherwise required to be furnished by or under this Act or the rules made thereunder”. The GST Law prescribes many returns, almost 22 return as of date, starting from GSTR-1 to GSTR-11. Which is to be construed as return for the purpose of Section 49(2) is not clearly prescribed which makes the Section ambiguous.

Earlier, when the GST was first launched, 3 returns in the form of GSTR-1, GSTR-2 and GSTR-3 were implemented and according to this ideology statutory provisions were framed. However, due to lack of infrastructure, GSTR-2 and GSTR-3 were suspended and GSTR-3B, a summary return, was introduced. However, suitable amendments to law were not carried out to make provisions workable after introduction of GSTR-3B.

Section 38, which deals with furnishing details of Inwards Supplies, governs the filing of GSTR-2, a return to avail the ITC. The said section has no restriction that GSTR-2 can only be filed if complete tax payable for the previous month is deposited. The said Section also doesn’t prescribe that GSTR-2 for a particular month cannot be filed if returns for previous periods are not filed. Further, Section 49(2) states that the ITC self-assessed in the return is to be credited to electronic credit ledger. Even GSTR-2 is a return for the purpose of Section 49(2). However, when the said return was suspended no alternate option was made available.

Contrary to the provisions of Section 38, Section 39(10) specifically puts restriction that return cannot be filed unless returns for previous periods are filed. Further the GST Portal doesn’t allow the filing of returns with part payment. In such cases assessee is prevented to avail ITC if he is not in a position to discharge entire tax liability. It is important to note here that Section 16 doesn’t contain condition that ITC can be availed only if entire tax liability of a month is discharged. Although it contains a condition that return under Section 39 is to be filed, it doesn’t prescribe that such return is to be filed within due date (or within due date to file return of September of next year). Hence,  under 3 return system one was enabled to avail ITC within time limit through GSTR-2 although he was not in a position to file GSTR-3. When the GSTR-2 was suspended and no alternate arrangement was made, the restriction in Section 16(4) becomes unworkable. When the basic framework to secure compliance itself is suspended, the law should have been suitably amended to make the restriction workable or alternate options should have been provided to ensure compliance. In the absence of both, a liberal interpretation in line with statutory intent is bound to be adopted.

For a statutory restriction, a narrow interpretation so as to frustrate the main objective of the Act is required to be avoided. It cannot be in dispute that the main objective of the GST Law is to provide seamless credit and to prevent multi-taxation. It was so held in judgement of Gujarat High Court in the case of M/S. SAFARI RETREATS PRIVATE LIMITED AND ANOTHER VERSUS CHIEF COMMISSIONER OF CENTRAL GOODS & SERVICE TAX & OTHERS [2019 (5) TMI 1278 - ORISSA HIGH COURT]. So any interpretation which frustrates this main objective is required to be avoided. Section 16(4) if interpreted in line with notices being issued would frustrate the main objective of preventing the multi-taxation and providing seamless credit.

The notices being issued do not recognise the fact that ITC relating to a particular month were disclosed in the return relating to that particular month. For example, ITC relating to the Feb 2018 has been disclosed in the GSTR-3B for Feb 2018 itself and not in return relating to October 2018. In such scenarios, the time limit prescribed in Section 16(4) is to be construed as ‘any credit pertaining to a FY, if availed in any return pertaining to period after the due date for filing return for the month of following September is time barred’. Instead, if it is interpreted as ‘any credit availed in return filed after the due date for filing return for the month of following September is time barred’ it would cause unintended hardship on assessee and might threaten the very existence of business. Both of them are not the intent of GST Laws.

Here it would be relevant note the amendment to Section 50(1) of CGST Act, 2017 carried out in 2019 where in interest is made applicable only on the net liability paid in cash after deducting the input tax credit. This amendment was approved in the 31st GST Council Meeting by approving Agenda item 7(xx) without any modification. The said Agenda item 7(xx) is reproduced here below for ease of reference.

“Agenda Item 7(xx): Proposal for amendment of Section 50 of CGST Act, 2017 to allow payment of interest on net cash liability

The liability to pay interest in case of non-payment of tax arises out of the provisions contained in Section 50 (1) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the “CGST Act”) which reads as follows:

“Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent., as may be notified by the Government on the recommendations of the Council.”

It may be seen from the above provision that interest is applicable on the amount of tax that has not been paid by the registered person.

2 Various other sections related to payment of tax are as follows:

i. Section 49(2) of the CGST Act provides that the input tax credit as self-assessed in the return (not necessarily be a valid return) of a registered person shall be credited to his electronic credit ledger.

ii. Section 49(3) and 49(4) of the CGST Act provides that the amount available in the electronic cash ledger may be used for payment towards tax, interest, penalty, fees or any other amount whereas the amount available in the electronic credit ledger may be used for payment towards output tax. The term “tax dues” has been defined, as per Explanation (b) to section 49 of the CGST Act so as to mean the tax payable under the CGST Act and does not include interest, fee and penalty.

iii. Section 39(7) of the CGST Act provides that the tax payable as per the return is required to be paid not later than the last date on which the return is required to be furnished.

iv. Section 2(117) of the CGST Act provides that a valid return means a return furnished under section 39(1) of the CGST Act on which self-assessed tax has been paid in full.

3. A perusal of above provisions indicate that the law permits furnishing of a return without payment of full tax as self-assessed as per the said return but the said return would be regarded as an invalid return. The said return, however, would not be used for the purposes of matching of ITC and settlement of funds. Thus, although the law permits part payment of tax but no such facility has been yet made available on the common portal. This being the case, a registered person cannot even avail his eligible ITC as he cannot furnish his return unless he is in a position to deposit his entire tax liability as self-assessed by him. This inflexibility of the system increases the interest burden. The same is illustrated as below:

Suppose a registered person has self-assessed his tax liability as ₹ 100/- for a particular tax period. He has an amount of ₹ 10/- as balance in his electronic credit ledger and he is eligible to avail ₹ 80/- as input tax credit (which would be credited to his electronic credit ledger only on furnishing of return). He is, therefore, required to pay only ₹ 10/- from his electronic cash ledger. The IT system will not allow the said registered person to furnish his return (and therefore the ITC of ₹ 80/- will not be credited in his electronic credit ledger) until he is in a position to discharge his complete self-assessed liability of ₹ 100/-. He would be liable to pay interest on the entire self-assessed tax liability of ₹ 100/- as he is not able to pay ₹ 10/- or part thereof from his electronic cash ledger.

It may be seen from the above that if the facility for part payment, as permitted under law, was available, the registered person would have been required to pay interest only on ₹ 10/- but presently he is liable for interest on entire tax liability of ₹ 100/-.

4. It is also pertinent to mention that the liability of any registered person is related to the value addition made by him since GST is leviable only on value addition. Accordingly, input tax credit is allowed to the registered person in respect of the tax paid by him on his inward supplies. And, while making the outward supplies, the input tax credit so allowed is permitted to be utilised for discharging his output tax liability. The remaining part which is generally equivalent to the tax on value addition is discharged through electronic cash ledger. Hence, by this mechanism the registered person effectively pays tax only on the value addition made by him. If this concept is applied for interest payable, then, it appears that the interest should also be charged on the tax payable on the value addition only, i.e. the amount of tax which is required to be paid through electronic cash ledger.

5. Presently the interest is not calculated by the IT system. The registered person himself calculates the said interest and deposits the same. It appears, therefore, that any change would not pose any IT related challenge.

6. The issue was deliberated by the Law Committee in its meeting held on 15.12.2018. The Committee observed that the proposal to charge interest only on the net liability of the taxpayer, after taking into account the admissible credit, may be accepted in principle. Accordingly, the interest would be charged on the delayed payment of the amount payable through the electronic cash ledger. However, where invoices/debit notes have been uploaded in statements pertaining to the period subsequent to the period in which they should have been uploaded, the interest shall be calculated on the amount of tax calculated on the taxable value from the date on which the tax on such invoices was due. This would require amendment to the Law.

7. Accordingly, in-principle approval of the GST Council is sought for carrying out the amendment in CGST/SGST Act as per the proposal contained in para 6 above. Law Committee may be directed to frame suitable amendments in the law. Similar amendments would be required in the respective SGST Acts also.”

While considering the charge of interest on net liability after deducting the ITC, the very GST Council, the supreme body for framing GST Law in the country, has recognised that the tax payer has not been made available the option to file the return with part payment. This would stop the assessee to even avail the ITC available. The flaw in the system has been discussed in detail and hardship due to this has been recognised and considered unreasonable. When such is the case, where required infrastructure to disclose the availment of credit through return is not made available, allegation cannot be made that the credit is not availed within time.

The very legislature considered the essence of GST Law. It describes that the supplier is required to pay tax only on the value addition done by him. This is ensured by ITC. When such is the very intent behind levy of GST, the provisions contained in GST Law should be interpreted to enable and support that intention and not to defeat it. In that sense, the provisions of Section 16(4) should be interpreted as ‘any credit pertaining to a FY, if availed in any return pertaining to period after the due date for filing return for the month of following September is time barred’. Any other interpretation would go against the very intent and basic structure of GST Law.

The council, after considering the hardship faced by the rigid interpretations, approved amendment of GST Law to levy interest on net liability instead of gross liability. The most important point to note here is that, although return is not filed, interest is not levied on tax amount covered by ITC. If it was the legislative intent to consider disclosure in return as availment, why would the legislature loosen the law to let go interest on ITC not at all availed?

In my humble opinion, Section 16(4) is required to be tried by considering ‘availment in books of account’ as the date of availment of credit. The liability to tax arises on the time of supply. Although, the due date for filing the return can vary according to the notified dates, liability arises on the day of time of supply. Return is just a means to disclose the liability as per books of accounts. Similarly, the actual availment of credit happens in the books of accounts and it is merely disclosed through returns. It would be wrong to say the availment happens only in GSTR-3B (more so when statutory provision which prescribe so are absent). If an assessee can prove with evidence that the credit was availed in books of account within the time limit prescribed in Section 16(4), ITC would be in compliance with Section 16(4).

Healthy criticisms or alternative views are most welcome.

Discussions to this article

[Sadanand Bulbule]

Sri. Hegde, may I draw your kind attention towards the following SC ruling on the issue under discussion:

2021 (12) TMI 840 - SUPREME COURT UNION OF INDIA & ORS. VERSUS AAP AND COMPANY

[PAWANKUMAR SONI]

Dear Shripada Hegde, The Article is very informative and focused on what are the required changes to be made. I think the whole problem has been created due to the non-operation of GSTR-2. Since both points that is interest levy and filing the return without full payment, are being effected in the backdrop that GSTR-2 will be operationalized and working. So although the department replaced the same with GSTR-3B but unfortunately for all dealers, the sections were not changed according to the procedure.

Also I am not able to get Agenda List of council meeting on TMI (https://www.taxmanagementindia.com/visitor/detail_rss_feed.asp?ID=18051), can you please share the link here?

Thank you once again for such wonderful Article

[R Dylan]

The article is will written and is thought provoking , however to add on to the same we can also look into this issues as follows assuming the year is Financial Year 2020-21

Based on the the Section 16(4) of Karnataka GST Act and Central GST Act, in which the Section states as follows:

‘Sec 16 (4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or [******]41 debit note pertains or furnishing of the relevant annual return, whichever is earlier.’

The above section states that ‘input tax credit in respect of any invoice cannot be claimed after the due date for the month of September of the next financial year’.

The Section 16(4) provides for the time limit for taking credit for invoices and debit notes. It could be understood that the due date for availing credit is on the Date of Invoice and not on the Date of return.

For example:

Document Type	Document Date	Earliest date for taking credit
Invoice	05.07.2020	In any of the returns in GSTR-3B from July 2020 to September 2021 or Annual Return whichever is earlier.
Debit Note	05.03.2021	In any of the returns in GSTR-3B from March 2021 to September 2021 or Annual Return whichever is earlier.

Thus in the above scenario if the ITC is not claimed in any in GSTR-3B of July 2020 to September 2021 or Annual Return whichever is earlier, then the law states that ‘registered person shall not be entitled to take input tax credit in respect of any invoice or debit note after the due date of furnishing of the return’.

The Section 16(4) states ‘the due date of furnishing of the return under section 39 for the month of September’; the date mentioned in the said section is a cutoff date to claim ITC. It is a point of limitation for the invoice to claim ITC and not a point of limitation or cutoff date for the return per se.

The Section 16(4) does not state that if the returns for the period FY 2020-21 are filed after ‘the due date of furnishing of the return under section 39 for the month of September’ the ITC is denied. There is no specific provision in Sec 16, that ITC will be denied if the returns for the period FY 2020-21 are filed after September of the following financial year.

The focal point of Section 16(4) is on the document called Invoice or Debit Note and not on the document called Return. GST Return is only a machinery mechanism to pass on the ITC (GSTR-1) and to claim the ITC (GSTR-3B)

Also in the Circular No. 123/42/2019– GST (Enclosed herewith) in the Clarification issued toward the question:

1. What are the invoices / debit notes on which the restriction under rule 36(4) of the CGST Rules shall apply?

Clarification states that : - The restriction of availment of ITC is imposed only in respect of those invoices / debit notes, details of which are required to be uploaded by the suppliers under sub-section (1) of section 37 and which have not been uploaded. Therefore, taxpayers may avail full ITC in respect of IGST paid on import, documents issued under RCM, credit received from ISD etc. which are outside the ambit of sub-section (1) of section 37, provided that eligibility conditions for availment of ITC are met in respect of the same. The restriction of 36(4) will be applicable only on the invoices / debit notes on which credit is availed after 09.10.2019.

Even in the above circular there is no mention that if there is delay in filing the return then ITC is denied. The circular mentions that, the denial of ITC is applicable, only when there is delay in furnishing the invoice. The restriction of availment of ITC is imposed only in respect of those invoices that are not appearing in Form GSTR-2A / GSTR-2B after the due date.

Based on the assumption that all the invoices pertaining to the period 01.04.2020 to 31.03.2021 are appearing in GSTR-2A/2B and have been uploaded by the supplier on or before the due date of GSTR -1, we can summaries that if the invoices are received after the due date of filing of September GSTR-1 then ITC can be denied and the person is not eligible to claim the ITC.

[PAWANKUMAR SONI]

Dear R Dylan Sir,

Your thoughts also give a new look at 16(4). Sir can you elaborate on how does 123/42/2019 circular can be linked with 16(4)

[R Dylan]

Dear Soni,

The Circular No. 123/42/2019– GST has no direct nexus to Sec 16(4) however the spirit of the entire circular revolves round the documents invoices and debit notes. The main documents invoices and debit notes that are the starting point of ITC and ending with GSTR 2A/GSTR-2B for claiming the ITC.

The Circular further strengthens the view of Mr Shripada Hedge given in the concluding para.

The para 3 of Circular is as follows "The conditions and eligibility for the ITC that may be availed by the recipient shall continue to be governed as per the provisions of Chapter V of the CGST Act and the rules made thereunder. This being a new provision, the restriction is not imposed through the common portal and it is the responsibility of the taxpayer that credit is availed in terms of the said rule and therefore, the availment of restricted credit in terms of sub-rule (4) of rule 36 of CGST Rules shall be done on self-assessment basis by the tax payers."

The concluding para of Mr Hegde is "In my humble opinion, Section 16(4) is required to be tried by considering ‘availment in books of account’ as the date of availment of credit. The liability to tax arises on the time of supply. Although, the due date for filing the return can vary according to the notified dates, liability arises on the day of time of supply. Return is just a means to disclose the liability as per books of accounts."

The duty of the taxpayer can be lined up as follows:

1. Receive the Inward Supply (Goods or Services)
2. Receive the Invoice
3. Check the eligibility of the invoice from ITC point of view (Contains basic info to pass on the ITC) and for Restrictions on ITC (Sec 17(5) or other applicable Rule 38, Rule 42 Etc.)
4. Account in the books of accounts an expense or an asset (to be set off against liability)
5. Wait to appear in GSTR – 2B (Not a choice but a chance)
6. Set off liability in the books (Outwards Tax liability – Input Tax Liability)
7. File Returns GSTR -3B accordingly.

Thus the self-assessment by the tax payer concludes by disclosing to the Government the liability as per books of account.

[PAWANKUMAR SONI]

Dear R Dylan Sir,

Appreciate your analysis sirji.