New GST Refund Rules for ITC Confusing for Taxpayers

As the deadline for filing GST returns under the new, revised mechanism is approaching, many taxpayers are still confused regarding the new rules for claiming a refund of input tax under GST. So, they are now waiting for some kind of clarification from the government’s side over the revised mechanism, which limits the maximum amount of input tax credit to 20% of the total eligible amount.

The GST returns under the new rules will begin starting from next week.

Earlier this month, the GST Council had announced updates in its GST refund policy, which restricts the ITC amount to a maximum of 20% of the claim amount in case of suppliers have not uploaded documents or details in the form GSTR 1.

Since it is still a new rule, there is a lot of confusion around it, as to where and how the rule is applicable. Moreover, businesses are also likely to face cash-flow challenges if their input credit refunds are restricted on the grounds of unavailability of supplier documents.

The decision to limit input credit refund was taken to reduce the instances where businesses were acquiring input tax credit by uploading fake returns. However, the lack of clarity over the new rules may do more harm than good. “GST returns of October 2019, which will be filed on or before 20th November are going to be the first return after introduction the newly introduced restrictions of 20 per cent,” says a Mumbai based Chartered Accountant.

One of the confusions among the taxpayers is how exactly the government will decide how much is the input tax credit eligible for a particular time. The input credit mechanism was introduced by the government to avoid tax cascading and refund the input tax amount back to the taxpayer while paying output tax. “Online credit is a dynamic amount so how to determine 20 per cent of it will be another issue to be addressed.”

Moreover, taxpayers also need clarity over the time or date for matching of invoices, since the process of return filing and invoice matching happens online only through the GSTN portal.

It was not until this month, two years after GST implementation, that the GST Council chose to activate the provision to match invoices, which was already mentioned under section 43A since the very beginning. This was because the government had come across several cases where some companies were reportedly misusing the input tax credit mechanism by claiming ITC on fraud invoices.

Another thing that troubles taxpayers is that only a part of the section 43A has been introduced, as of now. Since the remaining section is yet to be made effective, there is big uncertainty regarding the applicability of the rule in specific cases.