Circular 123 helped up Nov GST, but it’s a bad habit

Goods and Services Tax collections for the month of November 2019 crossed the magic figure of Rs 1 lakh crore (Rs 1.03 lakh crore) – an increase of almost 8% from the October figure. It is generally believed that the 8% increase was because of a “20% Circular” issued by the CBIC. The increase cannot be attributed to a pick-up in economic activity since there has been hardly any good news on this front for some months now.

When GST was being marketed to the nation in mid-2017, one of the key selling points was that there would be a seamless input tax credit that would be permitted at all stages of the supply chain thereby making GST a truly value-added tax. Eyebrows were raised and doubts arose when Section 17(5) of the CGST Act was unleashed, giving taxpayers a new term called Blocked Credits. Just when the resilient Indian taxpayer was getting used to the concept of blocked credits, the CBDT has issued two more missives that makes the availability of input tax credit anything but seamless.

Circular 123

Notification No 49/2019-Central Tax inserted Rule 36(4) to the CGST Rules 2017 as per which an artificial cap of 20% was put on claiming input tax credit in respect of invoices that have not been uploaded by the counterparty to a taxpayer. Circular No 123/42/2019 of November 11, lays out the details of this cap and provides a few illustrative examples. The Circular states that the cap would apply only to those invoices that have not been uploaded by the counterparty and hence full input tax credit can be claimed on IGST paid on import, etc.

The cap is not to be calculated supplier-wise but on the total value of invoices whose details have been uploaded by the counterparties, and the cap would be calculated on the number of invoices on the date of filing of the return of supplies. As an example, in case a taxpayer has received invoices amounting to Rs 10 lakh in a month, out of which the counterparty has uploaded invoices worth Rs 6 lakh, the total input tax credit that he can claim would be Rs 7.20 (Rs 6 lakh+20% of Rs 6 lakh). The balance amount can be claimed as and when invoices are uploaded by the other parties.

The Circular states that this being a new provision, the calculations would not be available on the common portal, but the taxpayer has to do this on a self-assessment basis. It is apparent that CBIC trusts the Indian taxpayer more than it trusts the software on which GST is running.

Incomplete Circular

The fact that Rule 36(4) has been inserted to increase GST revenues on a month-on-month basis is a no-brainer. Yet, this is a completely artificial restriction that not only tampers with the core of GST law -- seamless availability of input tax credit -- but also reduces the cash available to a taxpayer to discharge his obligations under GST.

The Circular is silent on what would happen if the invoices are never uploaded by the other party to the contract nor does it detail what would happen if debit/credit notes are issued against these particular invoices or when the invoices are cancelled.

The CBIC has not thought through the journey of an invoice from issue to amendment to rectification and cancellation, all of which are possible in any business transaction. The figure of 20% has obviously been arrived without any rationale and is there only because a number has to be put on a cap in tax laws.

The restrictions thought of in the Circular would work only when the concept of matching of invoices is implemented without any glitches. In the present system, it is only going to add to the resentment of the taxpayer, who is going to think of ways to ensure that he always claims higher amounts as input tax credit so as to get around the cap of 20%.

The CBIC would do well to defer Circular 123 and bring it in only in April 2020 if the proposed new system of invoices is up and running. Another issue that is debatable and is bound to find its way into courtrooms is whether CBIC has the power to impose monetary restrictions on the amount of credit a taxpayer can avail. The phrase “subject to such restrictions and conditions as may be imposed” occurs very frequently in GST literature. It is a moot point whether these restrictions and conditions can include monetary cuts. There are already enough restrictions on availing input tax credit -- there should be a tax invoice, payment to the counter-party should be made within a period of six months failing which the credit taken should be reversed, and refund cannot be claimed in case the inputs are on an inverted duty structure (tax rate on inputs is higher than on output supplies). Adding an artificial monetary restriction of 20% is going to further take away the essence of the GST law -- seamless availability of input tax credit across the entire supply chain.

GST 2.0

What is probably more worrying about this Circular is that it would tempt the government to keep adding such artificial monetary restrictions as and when they feel like it. The government has admitted that GST revenues are not sufficient to compensate the state governments for their revenue loss, which increases the possibility of the Centre taking this route.

There is talk in some quarters about a GST 2.0. Irrespective of what it is called, the government should ensure that a concerted effort is made to ensure that the law is not further complicated. It is going to become increasingly difficult to keep the fiscal deficit under control when there are limited options before the government. GST should not become the milch cow only so that the government to help fill the fiscal deficit pit.

(The writer is a Bengaluru-based tax expert)