[Analysis] Understanding Rule 37A and GSTN Advisory

Table of Contents

1. Introduction
2. Relevant Legal Provisions and Debate Thereon
3. Debate Around the Legal Provisions and the Advisory
4. Concluding Remarks

1. Introduction

The recipient’s reversal of input tax credit (‘ITC’), on account of non-payment of tax by the supplier, has been a subject matter of intense judicial scrutiny. The GST law explicitly prohibits recipients from availing ITC on supplies for which taxes have not been remitted to the Government treasury. In the initial years of GST implementation, the law lacked clarity on how recipients could verify whether their suppliers had indeed paid taxes to the Government treasury in a timely manner.

Rule 37A was introduced to address this, effective from 26-12-2022, outlining the procedure for the recipients to reverse ITC in cases where the supplier fails to furnish Form GSTR-3B. Notably, this provision is being applied for the first time in FY 2022-23, and the GSTN has issued an Advisory in this regard. The advisory mentions that an email will be sent to the taxpayer indicating the amount of reversal required as per Rule 37A for the said financial year.

Considering that FY 2022-23 is the first year of operation of Rule 37A and the deadline for reversing ITC is fast approaching, it is essential to comprehend the discussions surrounding Rule 37A and the potential complexities that may arise following the GSTN Advisory.

In this article, we delve into understanding Rule 37A and the corresponding Advisory issued by GSTN, specifically focusing on prevailing ambiguities that await clarification.

2. Relevant Legal Provisions and Debate Thereon

Under the GST law, a registered person is entitled to avail ITC, subject to compliance with the conditions outlined in Section 16(2) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’). One such condition, as per Section 16(2)(c), states that the recipient cannot avail ITC if the tax charged by the supplier has not been paid to the Government. Notably, the said condition is subject to the provisions contained in Section 41 of the CGST Act.

Section 41, as amended from 01-10-2022, provides that ITC availed by a recipient is liable to be reversed along with applicable interest where the supplier has not paid the tax to the Government. The law provides that the reversal shall be made in such manner as may be prescribed.

Accordingly, on the recommendations of the GST Council¹, Rule 37A was inserted into the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’) on 26-12-2022 to prescribe the mechanism for reversal of ITC in the event of non-payment of tax by the supplier by a specified date. Further, the person can re-avail the ITC, if the supplier subsequently pays the tax. As per the GST Council’s recommendation, this would ease complying with the condition for availment of ITC under Section 16(2)(c) of the CGST Act.

For ready reference, the relevant extract of Rule 37A ibid is reproduced below:

“Where input tax credit has been availed by a registered person in the return in FORM GSTR-3B for a tax period in respect of such invoice or debit note, the details of which have been furnished by the supplier in the statement of outward supplies in FORM GSTR-1 or using the invoice furnishing facility, but the return in FORM GSTR-3B for the tax period corresponding to the said statement of outward supplies has not been furnished by such supplier till the 30th day of September following the end of financial year in which the input tax credit in respect of such invoice or debit note has been availed, the said amount of input tax credit shall be reversed by the said registered person, while furnishing a return in FORM GSTR-3B on or before the 30th day of November following the end of such financial year

Provided that where the said amount of input tax credit is not reversed by the registered person in a return in FORM GSTR-3B on or before the 30th day of November following the end of such financial year during which such input tax credit has been availed, such amount shall be payable by the said person along with interest thereon under section 50…”

This Rule provides that the taxpayers have to reverse the ITC availed on such invoice or debit note, the details of which have been furnished by their supplier in their GSTR-1/IFF, but the return in FORM GSTR-3B for the said period has not been furnished by the supplier till the 30th day of September following the end of the financial year in which the ITC had been availed. The said amount of ITC is required to be reversed by such taxpayers while furnishing a return in Form GSTR-3B on or before the 30th day of November following the end of such financial year—post which interest would be leviable on such reversal of ITC.

Notably, it is also provided that in case the said supplier subsequently furnishes the return in Form GSTR-3B for the said tax period, the recipient may re-avail the reversed ITC in Form GSTR-3B for a tax period thereafter.

2.1 Recent Advisory by GSTN

To facilitate taxpayers for the initial year of applicability of Rule 37A, an Advisory was issued by GSTN on 14-11-2023 titled “ITC Reversal on Account of Rule 37(A)”, wherein taxpayers were informed that the system computed the amount of ITC required to be reversed on account of Rule 37A of CGST Rules is communicated to the taxpayers vide email. The Advisory further stated that the taxpayers are advised to take note of it and are requested to ensure that such ITC, if availed by them, is reversed as per rule 37A of CGST Rules before 30th of November, 2023 in Table 4(B)(2) of GSTR-3B while filing the concerned GSTR-3B.

3. Debate Around the Legal Provisions and the Advisory

With the aforementioned amendments, the introduction of Rule 37A and GSTN Advisory, the Government sought to address the prolonged legal disputes surrounding the recipient reversing ITC due to defaults by the supplier. Despite these efforts, certain ambiguities persist. The issuance of GSTN Advisory has further contributed to an already challenging situation. The issues outlined below require prompt resolution to prevent unwarranted litigations on the aforementioned subject.

• Debate on the validity of Section 16(2)(c): The condition states that ITC would be available subject to the payment of tax by the supplier. This puts a requirement on the recipient to ensure that his supplier has paid the tax to the Government, thereby putting an onerous burden on the recipient. The given condition has already been challenged before the various High Courts².
• Rule 37A not aligned with its parent sections: The provisions of the CGST Act as contained in Section 16(2)(c) and Section 41 require reversal of ITC in case where ‘tax has not been actually paid’ by the supplier to the Government. Whereas, Rule 37A requires reversal of input tax credit in case where ‘supplier does not file GSTR-3B’ for that particular tax period.
• Rule 37A does not consider other modes of payment: The Rule requires reversal of ITC if the taxes are not paid through Form GSTR-3B. This creates an ambiguity as to whether taxes discharged through Form GST DRC-03 or paid under protest or paid in response to notice/order or paid under any proceedings, would not be considered as ‘tax paid’. Whether the reversal requirement still arises where the supplier does not file Form GSTR-3B but pays taxes through other modes? If this is so, then it would be against the object of Section 16(2)(c) of the CGST Act.
• Ambiguity if ITC is availed in next FY: The Rule requires reversal of ITC if Form GSTR-3B has not been furnished by the supplier till the 30th day of September following the end of financial year in which the ITC has been availed by the recipient. Therefore, the ‘actual date’ of availment of ITC is relevant for determination of due date of reversal of ITC as per Rule 37A. For Example, ITC of FY 2022-23, if availed in May 2023 (FY 2023-24), then whether the reversal would require to be made till 30^th November of the year 2024 (basis the actual date of availment of ITC) or till 30^th November of 2023 (basis the entitlement to avail ITC which arises in FY 2022-23). The intention of the provision does not seem to allow the deferment of reversal of ITC to the next year. Thus, clarity on the same is still awaited.
• Ambiguities on levy of Interest on non-reversal of ITC: The Rule states that interest would be applicable if the reversal is not made upto 30^th November following the end of such financial year during which such ITC has been availed. This creates an ambiguity as to whether no interest would be applicable on ITC wrongly availed and utilized as per Section 50(3), if the recipient reverses the said ITC before the prescribed due date of 30^th Further, where ITC is not reversed within the specified timeline of 30^th November, whether interest meter would start from the date of ‘utilization³‘ of the said ITC or from the 01^st day of December till the date of reversal. The Advisory issued for the facilitation of taxpayers could not fulfill its true purpose due to the following intricacies:

1. 1. The Advisory does not state the computing methodology of the system-generated amount. In the absence of such details, the taxpayers may find it difficult to reconcile the emailed figure with their internal reconciliation mechanism.
   2. The deadline for ITC reversal for FY 2022-23 is about to end, the taxpayers might not have much time to reconcile the system-computed amount with the amount of ITC they have already reversed or would reverse by the due date as per their calculations.
   3. The Advisory did not state whether taxpayers are provided with any option to reply/raise a query if any inaccuracy is found in the system-computed amount.
   4. Since, the quarterly return filers would have already filed their GSTR-3B for the quarter ending September 2023 and made the ITC reversal on self-determination basis, any difference from the system computed amount would result in hardship for such taxpayers to revisit their computations which will eventually result in unnecessary litigation.
   5. In case a taxpayer does not reverse the whole or part of the system computed amount intimated vide email, it is unclear as to whether the taxpayer would get a notice for further proceedings.

4. Concluding Remarks

After the introduction of Rule 37A, taxpayers are overburdened with invoice wise reconciliations to claim their bonafide credits. At present, for compliance of Rule 37A, taxpayers may refer relevant column of Form GSTR-2A which specifies the GSTR-3B Filing Status of the supplier as ‘Yes’ or ‘No’ against each invoice and debit note. This would be of help to the taxpayers for computation of amount of ITC to be reversed in case the supplier does not file Form GSTR-3B.

The system-generated reversal amount, to be provided by the department, as per the GSTN Advisory, will further complicate the reconciliation process. India Inc. needs time to build a suitable infrastructure to deal with another set of reconciliations. The Government should soon release more detailed guidelines to address various intricacies and ambiguities as highlighted above.

1. 48th GST Council Meeting held on 17-12-2022
2. Bharti Telemedia Ltd. vs Union of India (Delhi High Court) W.P.(C) no. 6293/2019; LGW Industries Limited vs Union of India (Calcutta High Court) W.P. No. 23512 of 2019
3. In terms of Rule 88B of the CGST Rules