This Outlook intends to apprise you regarding Input Tax Credit (‘ITC’) of tax paid under Reverse Charge Mechanism (‘RCM’) considering restriction prescribed under Rule 36(4) of the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’).

At first place, there is no condition under Section 16 or any other provision of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) that restricts recipient to avail ITC only when supplier has filed Form GSTR-1. From October 9, 2019, the Government inserted sub-rule (4) in Rule 36 of the CGST Rules providing that ITC on invoices and debit notes not uploaded by suppliers in their GSTR-1 Return, shall not exceed 20% (10% effective December 26, 2019) of eligible ITC available on invoices and debit notes uploaded by suppliers. Thus, Rule 36(4) presently restricts ITC to 110% of tax reported by suppliers in their GSTR-1 Return.

This said restriction does not apply to invoices issued by Input Service Distributor (‘ISD’) and reverse charge supplies procured from unregistered suppliers since such invoices are not reported in Form GSTR-1.

NITYA Comments: 

As per literal construction of Rule 36(4), restriction will apply to all invoices issued by registered supplier and reportable in Form GSTR-1 even where tax is payable by recipient under reverse charge. At same juncture, the purpose of this restriction was to allow ITC only where the supplier has paid tax. Thus, logically, this restriction should not apply to reverse charge procurements (procurement whether from registered or unregistered supplier) since tax would be paid in the Government account by the recipient. 

It is possible that the department adopts strict interpretation of this provision and include reverse charge procurements for invoices issued by registered suppliers while applying Rule 36(4). In such a situation, the taxpayers should consider seeking clarification from jurisdictional authorities or consider filing a writ petition challenging the provision itself (to the extent it includes reverse charge supplies from registered suppliers).