New Provision Relating to Restricted Input Tax Credit

Seamless flow of ‘Input Tax Credit’ is the main aim behind the implementation of Goods and Services Tax (GST). However, since its inception i.e. 1^st July 2017, GST officials have come across various cases relating to fraudulent availment of the input tax credit. Various stringent steps are already taken by the Government to curb the fraudulent availment of the input tax credit. Notably many of such steps are also introduced vide the Finance Act, 2022. One such step, as introduced vide the Finance Act, 2022, is substituted provisions of section 38 of the Central Goods and Services Tax Act, 2017. The substituted provision deals with the circumstances when the input tax credit availment will be restricted. The present article provides an understanding of the new provision relating to restricted input tax credit; specifies circumstances attracting restricted input tax credit and explains the corresponding effect on the conditions for availing input tax credit.

Understanding the new provision relating to a restricted input tax credit –

Vide clause 104 of the Finance Act, 2022, the provisions of section 38 of the Central Goods and Services Tax Act, 2017 are entirely substituted. Let us see what the new provisions say. Sub-section (1) to section 38 simply states that the recipient of goods or services or both will electronically be provided with Form GSTR-2B covering details of –

Outward supplies as furnished by the supplier via Form GSTR-1; and
An auto-populated statement summarizing details of an input tax credit.

Sub-section (2) to section 38 states that auto-populated stated in Form GSTR-2B will consist of two parts which are –

Part 1 – deals with the details of inward supplies of goods or services or both in respect of which input tax credit is available to the recipient; and
Part 2 – deals with the details of inward supplies of goods or services or both in respect of which input tax credit is restricted/ not available to the recipient.

Notably, clause (b) to sub-section (2) of section 38 covers six situations on the basis of which the input tax credit of the recipient can be restricted. The same is explained hereunder. Further, it is important to note here that, the Finance Act, 2022 has got presidential assent on 30^th March 2022. However, provisions of clause 104 (substituting provisions of section 38) will be effective from the date yet to be notified.

Circumstances attracting restricted input tax credit –

Following are the six circumstances, as stated under clause (b) to sub-section (2) of section 38, on the basis of which input tax credit will be restricted in the hands of the recipient –

The supplier of goods or services or both has obtained GST registration within the prescribed period;
The supplier of goods or services or both has defaulted in payment of tax for the continuous prescribed period;
The supplier of goods or services or both has availed excess input tax credit by such limit as may be prescribed;
The supplier of goods or services or both has more output tax payable as furnished via Form GSTR-1 as against output tax paid via Form GSTR-3B by such limit as may be prescribed;
The supplier of goods or services or both is covered within the prescribed class of person; and
The supplier of goods or services or both has defaulted in discharging his tax liability, as per provisions of section 49(12), subject to prescribed conditions and restrictions.

Notably, the prescribed period/ prescribed time limit/ prescribed limit, as stated above is not prescribed by the Government. Surprisingly, going through all the above six circumstances, one can come to know that the input tax credit in the hands of the recipient is restricted on account of the default/ failure committed by the supplier. Thus, in nut-shell, the supplier has to be tax compliant in order to enable the recipient to avail of the input tax credit.

Corresponding effect of the same on conditions for availing input tax credit –

As we know, the recipient of goods or services or both needs to satisfy all the conditions prescribed under section 16(2) of the Central Goods and Services Tax Act, 2017 in order to avail of the input tax credit. In order to give the corresponding effect of substituted provisions of section 38, a new input tax credit condition is inserted vide clause 100 of the Finance Act, 2022. Accordingly, clause (ba) is inserted to section 16(2) which states that input tax credit is available to the recipient only if the same is not restricted under section 38.