The Central Government has recently issued multiple Notifications to make several changes in GST law. Vide this update, we have discussed key changes as under:

A. Amendment in the Central Goods and Services Tax Act, 2017 (‘CGST Act’)

Vide Notification No.92/2020-Central Tax dated December 22, 2020, the Central Government has notified several provisions of the Finance Act, 2020 (‘Finance Act’) with effect from January 1, 2021. The major changes are as follows:

Time limit to avail Input Tax Credit on Debit Notes:

• For purpose of computing time limit to avail Input Tax Credit (‘ITC”) on Debit Notes, linkage of Debit Notes with original Tax Invoices has been removed. Accordingly, taxpayers can avail ITC on Debit Notes till September of succeeding Financial Year (‘FY’) or annual return of FY in which Debit Notes are issued, whichever is earlier.

NITYA Comments: This amendment will apply to all Debit Notes issued post January 1, 2021 even if such Debit Notes relate to Tax Invoices issued prior to January 2021. The recipients will be eligible to avail ITC on all such Debit Notes.

Registration:

• Proper Officer is being empowered to cancel / suspend registration of voluntarily registered persons in specified situations similar to normal registered persons.

• For delay in filing application for revocation of cancellation of registration by taxpayer, Additional / Joint Commissioner and thereafter Commissioner have been empowered to condone delay of 30 days each.

Offences and Penalties:

• Enabling provisions are enacted to penalize person who retains benefit of following transactions or on whose instance such transactions are conducted:

o Supply of goods or services without issuance of Invoice or issuance of incorrect or false Invoice;
o Issuance of Invoice or Bill of Supply without supply of goods or services;
o Claim of ITC without actual receipt of goods or services;
o Improper availment / distribution of ITC under ISD mechanism

Penalty would be equivalent to tax evaded or ITC availed or passed on in such cases.

B. Amendment in the CGST Rules

Vide Notification No.94/2020-Central Tax dated December 22, 2020, the Central Government has made several changes in the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’). These changes are effective from January 1, 2021 unless specified otherwise below. The major changes are as follows:

Restriction on unmatched ITC reduced to 5 percent of matched ITC (from 10 percent)

• Rule 36(4) of the CGST Rules restricts availment of ITC on un-uploaded Invoices and Debit Notes to 10 percent of ITC on uploaded Invoices and Debit Notes. This has now been reduced to 5 percent.

• Further, only Invoices and Debit Notes where suppliers have furnished (filed) GSTR-1 will be considered instead of uploaded Invoices and Debit Notes.

NITYA Comments: Circular No. 123/42/2019-GST dated November 11, 2019 clarified that Rule 36(4) would apply only to those Invoices and Debit Notes on which ITC is availed after October 9, 2019 [date of enforcement of Rule 36(4)]. Applying this logic, this restriction will apply to ITC availed post January 2021 for which GSTR-3B will be filed in February 2021 and later. In our view, since ITC is considered to be availed on date of filing of GSTR-3B, this change will apply to GSTR-3B filed for December 2020 (in January 2021) as well.

Further, consideration of Invoices and Debit Notes only where supplier has filed GSTR-1 (not just uploaded Invoices and Debit Notes) will make filing of GSTR-1 at supplier’s end as pre-condition for availing ITC.

Payment of minimum 1 percent liability through Electronic Cash Ledger

• Rule 86B is inserted in the CGST Rules restricting taxpayers from using more than 99 percent ITC for discharging output GST liability. In other words, taxpayers will need to pay minimum 1 percent of their GST liability in cash.

• This restriction will apply to taxpayers whose value of taxable supply (other than exempt and zero-rated supply) in a month exceeds Rs. 50 Lakhs.

• The restriction would not be applicable to following set of taxpayers:

o Taxpayer or whose Managing Director, Wholetime Director, any of two partners have paid Income Tax exceeding Rs. 1 Lakh in the preceding 2 financial years;
o Taxpayer received refund of unutilized ITC exceeding Rs. 1 Lakh in preceding financial year;
o Taxpayer who discharged output tax liability in cash exceeding 1 percent of total liability in a financial year (when applied cumulatively); and
o Government Department, Public Sector Undertaking, Local Authority or Statutory Body.

NITYA Comments: While Section 49(4) of the CGST Act enables Government to impose conditions for utilization of ITC, this provision is amenable to legal challenge on multiple grounds like marred by excessive delegation, taking away vested right of taxpayers, discriminative etc.

Importantly, this provision will have limited applicability for following reasons:

• Exemption for taxpayers who paid Income Tax (Rs. 1 Lakh in last 2 financial years) would be satisfied by most of taxpayers. Reckoning of Income Tax payment by taxpayers’ Managing Directors, Wholetime
Directors, Partners etc. further expands ambit of exemption. It is pertinent to note that “Income Tax paid” would encompass TDS and Advance Tax as well; and

• Cumulative application of this provision on financial year basis.

This provision needs to be applied on monthly basis and only for those months where taxpayer’s value of taxable supply exceeds Rs.50 Lakhs. For reasons same as for application of amended Rule 36(4) of CGST Rules, this restriction will apply for GSTR-3B filed for December 2020 onwards.

This restriction would apply tax-wise (separately for CGST, SGST and IGST) and not in totality.

Restriction on filing GSTR-1 where GSTR-3B is not filed:

• Facility to file GSTR-1 will be blocked where taxpayer has not filed GSTR-3B for preceding two tax periods. Similar restriction would be imposed on taxpayer filing quarterly returns.

• This change is effective from December 22, 2020.

NITYA Comments: This restriction is made to curb cases where taxpayers file GSTR-1 to enable recipients to avail ITC but do not file GSTR-3B nor pay taxes.

Reduction in validity of E-Way Bill:

• Validity of E-Way Bill is narrowed to one day for 200 kms compared to earlier prescribed limit of one day for 100 kms.

NITYA Comments: The restriction in validity of E-Way Bill would lead to significant logistics and supply chain challenges for taxpayers while transporting goods.

Cancellation of registration in certain cases:

• Additional circumstances have been laid out which can trigger cancellation of registration viz:

o If taxpayers avail ITC in contravention of Section 16 of the CGST Act or corresponding Rules;
o If details of outward supplies declared in GSTR-1 exceed than corresponding figures in GSTR-3B of same month for one or more tax periods; and
o Violation of Rule 86B.

• This change is effective from December 22, 2020.

NITYA Comments: This amendment is prone to misuse by GST authorities and can be source of litigation even in cases involving genuine interpretational issues.

CBIC has clarified that this provision will be invoked only in cases involving significant differences based on system checks and not ones involving minor clerical errors.

Suspension of registration:

• Proper officers have been empowered to suspend registration where there are significant differences or anomalies between:

o GSTR-1 and GSTR-3B;
o ITC availed in GSTR-3B and data available in GSTR-2A / GSTR-2B; and
o Such other analysis as recommended by GST Council.

NITYA Comments: The provision is silent as to what will amount to ‘significant differences or anomalies’. In the absence of definition, this provision is amenable to misuse and may lead to litigation even for genuine taxpayers.

• Proper officer can suspend taxpayer’s registration even without according an opportunity of hearing to taxpayer.

NITYA Comments: The provision of suspension of registration without giving an opportunity of hearing to taxpayer, is amenable to legal challenge being in express violation of principles of natural justice.

In case of suspension of registration, taxpayers will not be able to generate E-Invoice and E-Way Bill which will bring entire business of taxpayer to standstill.

• Proper officer needs to issue Form GST REG-31 to intimate taxpayers of aforesaid discrepancies and give show cause to taxpayer why its registration should not be cancelled.

• No refund will be granted to taxpayer during period of suspension of registration.

• This change is effective from December 22, 2020.

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