Tax Query: How Does the Newly Amended Section 16(2) Affect My Business’s ITC Claims?

1. How does the newly amended Section 16(2) of the CGST Act affect my business’s ITC claims?

The Finance Act 2021 had introduced a new clause (aa) under Section 16(2) of the Central Goods and Services Tax (CGST) Act. However, this clause came into force only from 1st January 2022. According to the newly amended section, taxpayers can claim an input tax credit (ITC) only if their vendors upload an invoice or debit note in their corresponding GSTR-1 return or Invoice Furnishing Facility (IFF). This data has to reflect in the recipient taxpayer’s GSTR-2B statement. 

For businesses, the newly amended Section 16(2)(aa) majorly affects three things regarding ITC claims-

  1. The pressure to frequently reconcile purchase data between the books and GSTR-2A/2B increases. Businesses now need to implement a real-time, preferably automated data reconciliation system to ensure accurate ITC claims. This will keep the risk of demand notices, interest, and penalties at a minimum.
  2. The dependency on vendors to upload invoices on time is unprecedented. If an invoice does not reflect in an enterprise’s GSTR-2B statement, the enterprise cannot claim ITC. Every GST-registered business should look at automating vendor communication and payments as it’s challenging to track non-compliant vendors and missing ITC on an invoice level.
  3. Lastly, a business’s working capital and profitability hit when 100% ITC is not claimed due to inefficient reconciliations or non-compliant vendors. The logic is simple – If ITC due to a business is not fully claimed, then the GST liability needs to be paid in cash to that extent. This affects cash flows and, in turn, working capital. 

2. How is Section 16(2) different from Rule 36(4) of the CGST Rules?

Rule 36(4) has been in place since 2019, and it governed provisional ITC, which was capped at 20% then. This gave taxpayers enough leeway to claim the ITC on invoices their vendors had not yet uploaded or defaulted in uploading. This limit later got capped at 10% and then 5%. From 1st January 2022, Rule 36(4) was further amended to obliterate the concept of provisional ITC. Now, taxpayers can only claim ITC to the extent their suppliers upload invoices in their GSTR-1/IFF, and the same is reflected in their GSTR-2A/2B. 

This new amendment has brought Rule 36(4) in line with the newly amended Section 16(2)(aa) of the CGST Act. 

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