Perils of clause (aa) to Section 16(2) of the CGST Act for a Registered Person under GST

The GST law has been an ever evolving one, with the legislature shaping the same as the practical and financial situations demands. The legislature has in the recent past specifically trained its eyes and tightened its hands on the aspects pertaining to credit availment and credit eligibility.

This article will cover the pain and evil effects caused to the registered person through insertion of clause (aa) to Section 16(2) of the Central Goods and Services Tax Act, 2017 (“CGST Act”).

The legislature in the Finance Act, 2021, amongst other amendments, had specifically inserted the clause (aa) to Section 16(2) CGST Act to be enacted w.e.f. from the date to be notified. The said insertion was made effective from 1-1-2022 vide Notification No. 39/2021-Central Tax dated 21-12-2021¹.

Clause (aa) to Section 16(2) of the CGST Act, prescribes the condition that a registered person would not be eligible to ITC (Input Tax Credit) of goods or services unless the details of the invoice issued by the GST registered supplier is reported by the “supplier” in his/her outward return and such details have been communicated to the “recipient” (registered person) in the manner specified under Section 37 of the CGST Act. In other words, a registered person would not be eligible to avail the ITC on an invoice unless the same is reflecting in Form GSTR-2B of the registered person.

In an ideal scenario where a registered supplier is making a supply, the supplier would be required to report the said supply in his outward tax return and pay the applicable GST while filing the monthly return in Form GSTR-3B. It seems that the intention of the legislature is to ensure that the supplier should report the outward supplies and discharge the tax liability on the said outward supplies in a timely manner, based on which the registered recipient would be eligible to take/avail the ITC.

The GST law has prescribed certain exceptional situations for payment of tax, one of which is where the recipient pays the tax under reverse charge basis as opposed to the supplier. Hence, even if the supplier is registered under GST, then said supplier is absolved from the liability to discharge the GST in the return. However, the supplier would not be absolved from the liability to generate and report the invoice for the said supply if registered under GST. Consequently, the registered supplier would be required to issue a GST invoice to the recipient with the declaration that tax is payable under RCM and report the said GST tax invoice in the Form GSTR-1 of the tax period. The recipient would be required to pay the tax under RCM in his/her Form GSTR-3B based on the invoice issued by the supplier and reflecting in the Form GSTR-2B of the recipient.

In a real-world situation, where a registered supplier is providing supplies on which tax is payable under Reverse Charge Mechanism(‘RCM’) by the recipient (say sponsorship), there could be a laxity in the hand of the supplier in reporting of the GST invoices issued, since no tax is payable by the supplier and the late filing of returns would only invite some late fees.

However, the laxity in filing the GST return in the hands of the recipient would have major implications for the “recipient”. Since, w.e.f. 1-1-2022 on account of clause (aa) of Section 16(2) of the CGST Act, the recipient is not eligible to avail the ITC of the tax paid under RCM on an invoice which is in the recipient’s possession. Hence, a registered recipient who fulfils all the conditions under Section 16(2) of the CGST Act, except the condition prescribed in clause (aa) i.e., the requirement for the supply to reflect in the GSTR-2B of the recipient, on account of the procedural lapse on part of the supplier, the recipient would be disentitled from availing of the rightful ITC.

Attention is also invited to the provisions of Section 41 of the CGST Act, which governs the availment of ITC, have been amended w.e.f. 1-10-2022 vide Notification No. 18/2022-Central Tax². Section 41(1) of the CGST Act stipulates that a registered person shall be entitled to avail the credit of eligible input tax credit on “self-assessment basis” in the return and the said credit claimed would be credited to the electronic credit ledger. Sub-section (2) to Section 41 of the CGST Act stipulates that the registered person who has claimed credit under sub-section (1) would be required to reverse the ITC with interest where the supplier has not paid the tax.

It can be argued that if a registered recipient avails the ITC as per Section 41 of the CGST Act, on self-assessment basis, there is no provision for ITC reversal in case of violation of the conditions of Section 16(2) of the CGST Act, where the tax is payable under RCM and not by the supplier under forward charge. However, the said argument may not be sustainable since, Section 41(1) of the CGST Act, only entitles a registered person to avail ITC which is an eligible credit. In case the condition of Section 16(2) (aa) of the CGST Act is not fulfilled, the ITC would not be an eligible credit and could be recoverable under Section 73 or Section 74 of the CGST Act.

Hence, the clause (aa) of Section 16(2) of the CGST Act, entails an unjust punishment for a law-abiding registered person who receives supplies from a registered supplier on which tax is payable under RCM, if the supplier shows laxity in reporting of the supplies. The recipient having paid tax under RCM only on account of a reporting lapse which is procedural in nature, would stand to be punished even where the revenue is not prejudiced.

Consequently, a registered person receiving supplies on which tax is payable under RCM from a registered supplier, need to be mindful and ensure that the “supplier” has reported the said supplies in the Form GSTR-1 in a timely manner, in absence of which the rightful ITC could stand denied.

Without prejudice to the recipient’s duty, the legislature should take cognizance of the possible hardship which would be faced by a law-abiding recipient in the current situation where the revenue in no way is prejudiced, and make appropriate amendment/insertions in the law to exclude the supplies under RCM from the ambit of clause (aa) of Section 16(2) of the CGST Act.