Notices received for violation of restriction under Rule 36(4) and availing excess ITC – Way Forward

by | Jan 31, 2020 | Outlook

In NITYA’s Insight | Issue 66 dated November 14, 2019 (link of our update), we discussed Rule 36(4) of the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’), which restricts availment of Input Tax Credit (‘ITC’) on un-uploaded invoices and debit notes to the extent of 10 per cent of ITC reflected in Form GSTR-2A. The taxpayers are now receiving auto-generated e-mails from the department directing reversal of ITC availed in excess of the threshold stated under Rule 36(4).

In this update, we will discuss the way forward for taxpayers who receive such communications.

 Departmental e-mails do not provide any basis of computation

The taxpayers are receiving e-mail communications stating that ITC recorded in GSTR-3B is in excess of 10 per cent ITC reflected in GSTR-2A. These communications advise taxpayers to either reverse the excess ITC or deposit the same (if utilised) through FORM DRC-03 along with applicable interest. These communications neither raise any demand nor provide any basis of computation. Hence, the same are incomplete in themselves. 

Necessity of Document Identification Number (‘DIN’)

The CBIC vide its Circular No. 128/47/2019-GST dated December 23, 2019 (‘Circular’) has made quoting of DIN mandatory on all communications (including e-mails) sent by any departmental officer across the country to the taxpayers (Refer NITYA’s Insight Issue 64 dated November 12, 2019 on the issue) (link of our update). Para 5 of the Circular states that any communication which does not bear electronically generated DIN, shall be treated as invalid and shall be deemed to have never been issued.

These e-mail communications are being issued without stating DIN and are thus invalid per-se.

NITYA’s Comments:

 Currently, the departmental e-mail communications are neither notices under Section 61 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) (scrutiny of returns) nor under Section 73 or Section 74 of the CGST Act (show cause notice). These communications do not contain any basis of demand. Further, in the absence of DIN, such communications are invalid. The taxpayers are advised to pro-actively reply to the department on these lines and seek basis thereof.

 In parallel, taxpayers should prepare reconciliation of ITC to demonstrate adherence to Rule 36(4) if need arises in future. Taxpayers can also consider challenging the validity of Rule 36(4) by filing writ petitions before jurisdictional High Courts as already challenged before the High Courts of Delhi[1] and Gujarat[2].