GST UPDATE ON RULE 37A OF CGST RULES, 2017

Section 16(2)(c) of CGST Act, 2017 states that the Input tax credit shall be allowed to the recipient only if the tax charged in respect of such supply has been actually paid to the Government exchequer. Now, in the 48th GST Council meeting, it was recommended to insert Rule 37A in CGST Rules, 2017 to prescribe the mechanism for reversal of input tax credit by a registered person in the event of non-payment of tax by the supplier. This proposal has been implemented vide Notification no. 26/2022 –Central Tax dated 26th December, 2022. This notification notifies the Central Goods and Services Tax (Fifth Amendment) Rules, 2022 through which rule 37A has been inserted in the rules. This rule is the subject matter of today’s GST update.

To start with, let us check the bare language of this rule: -

“37A. Reversal of input tax credit in the case of non-payment of tax by the supplier and re-availment thereof-

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-3Bon or before the 30thday 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.

Provided further that where the said supplier subsequently furnishes the return in FORM GSTR-3B for the said tax period, the said registered person may re-avail the amount of such credit in the return in FORM GSTR-3B for a tax period thereafter.”.

The analysis of this rule makes it clear that: -

• It covers those invoices or debit note which were duly furnished in GSTR-1 or using Invoice furnishing facility but have not been included in GSTR-3B.

• This rule will apply if the supplier does not include the same in GSTR-3B of that particular tax period or subsequent tax period upto the 30th day of September following the end of financial year.

• In this case, the ITC so availed by the recipient shall be reversed while furnishing return in form GSTR-3B on or before the 30th day of November following the end of such financial year.

• If the said registered recipient does not reverse the said amount by due date; interest shall be payable under section 50.

• If the supplier subsequently furnishes GSTR-3B, the said recipient may re-avail the amount of ITC so reversed.

On analysis of this rule, it is ample clear that while framing this provision, the law makers have followed the easiest route rather than the right one. In the cases where the recipient has complied with all the conditions of availment of ITC as prescribed under section 16 of CGST Act, 2017; however, the supplier has defaulted in payment of tax; is it justified to ask the recipient to pay back the credit? The right way to deal with such situations is to get hold of the defaulting suppliers and follow the procedure already prescribed in chapter XV of CGST Act, 2017. When GST law prescribes the procedure how recovery will be made in cases where the supplier defaults; is it justified to ignore the same and prescribe a provision to hit the soft target – the innocent recipients who have complied with all the conditions for availment of ITC that are in their control. Can they be held guilty for the situations which are not in their control at all. Even if the law makers intend to secure the interest of Revenue, the right way would have been to prove the default or presence of guilty mind on part of recipients first, rather than asking for the reversal at the first place.

This rule 37A also create ambiguity in certain cases. Let us take an example. Suppose a supplier shows invoices of ? 50 lakhs in GSTR-1 filed by him. But he pays tax only on invoices of ? 28 lakhs. The differential amount being ? 22 lakhs is defaulted amount against which recovery can be made under newly inserted rule 37A. But while framing this rule, perhaps the law makers thought department has some sort of super power with the help of which it can ascertain on which invoices tax have not been paid in GSTR-3B. Now, if the supplier pays tax on some of these invoices subsequently. How will the department ascertain tax on which invoices remains unpaid and action should be taken against which recipients.

Further, the rule says if supplier defaults, the recipient must pay interest on the same; without any fault at his side. Interestingly, when subsequently the supplier pays tax, he may re-avail the ITC so reversed but what about the interest? Interest is always a loss, whether you pay it for your fault or for fault of others, right?

Let us hope the Government amends the relevant provisions to increase the strictness against the actual defaulters and stop punishing the innocent recipients without proving their fault.

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GST UPDATE ON RULE 37A OF CGST RULES, 2017

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