The government has notified several changes in the GST law and has also put into effect several amendments brought in vide the Finance Act, 2020. This alert covers the key changes notified in the GST law.

Key changes brought in Goods and Service Tax Rules, 2017 through Notification No. 94/2020-Central Tax dated 22 December 2020- 

Restriction on the utilization of ITC available to the extent of 99% of the outward tax liability

[w.e.f 1 January 2021]

Rule 86B has been inserted to restrict the utilization of Input Tax Credit (ITC) to the extent of 99% of tax liability for the relevant period for taxpayers having taxable supply (other than exempt supply and zero-rated supply) in a month exceeding INR 5 million. This restriction is not applicable to taxpayers fulfilling any of the following criteria:

  • The taxpayer itself, or specified persons such as the Proprietor, Karta, Managing Director, Whole-time Directors, or any of its two Partners, Members of the Managing Committee of Associations or Board of Trustees, as the case may be, who have paid more than INR 1 lakh as income tax under the Income-tax Act, 1961 in each of the last two financial years;
  • The taxpayer has received a refund of unutilized ITC exceeding INR 1 lakh in the preceding financial year on account of either zero-rated outward supplies made without payment of tax, or inverted duty structure;
  • The taxpayer has discharged GST liability by way of cash exceeding 1% of the output tax liability, applied cumulatively, up to the relevant tax period in the current financial year; or
  • The taxpayer is a Government Department, a Public Sector Undertaking (PSU), a local authority, or a statutory body.

Thus, the taxpayers with taxable supplies exceeding INR 5 million in a month and not satisfying the aforesaid criteria will be required to pay at least 1% of the monthly GST liability by cash even if they have sufficient credit in their ECL.

Tightening of restrictions on availing ITC under Rule 36(4) [w.e.f 1 January 2021]

  • Now, the claim of ITC cannot exceed 105% of the eligible ITC available in respect of invoices furnished by the vendors in their GSTR-1 [earlier this limit was 110%];
  • Also, now only the invoices 'furnished' by the vendors would be eligible to calculate the revised limit of 105%, i.e. if the invoices have been 'uploaded' by the vendors but the GSTR-1 is not filed, then such invoices cannot be considered for determination of the ITC limit under Rule 36(4);
  • In view of the newly introduced Quarterly Return Filing and Monthly Payment (QRMP) scheme, ITC shall also be allowed in respect of invoices furnished the Invoice Furnishing Facility (IFF) introduced for quarterly return filers.

Revised procedure for verification at the time of new GST registration

  • Rule 8 has been amended to provide for biometric-based Aadhar authentication along with a photograph or KYC documents based registration;
  • Further, an applicant will also have to visit a notified Facilitation Centre for verification of the original copy of the documents uploaded, and the application process will be completed only after the completion of such verification.

Cancellation/Suspension of GST registration in certain cases

The government has amended Rule 21 to provide for the following additional cases in which the GST registration will be liable for cancellation:

  • The taxpayer has availed ITC in violation of Section 16 of the CGST Act;
  • Outward supplies furnished in GSTR-1 are in excess of outward supplies declared in GSTR-3B for the same period;
  • Taxpayer violates provisions of Rule 86B (explained above).

Further, in addition to the existing powers, proper officer has been granted powers to immediately suspend (and not cancel) the GST registration under Rule 21A without giving the taxpayer an opportunity of being heard in cases where -

  • On Comparison of GSTR-1 and GSTR-3B of the Taxpayer; or
  • On comparison of GSTR-3B of the Taxpayer and GSTR-1 of its supplier; or
  • Other analysis carried out on the recommendation of the GST Council

display significant differences or anomalies indicating contravention of the provisions of the GST law, leading to the cancellation of registration. The proper officer can also revoke the suspension of registration anytime during the pendency of proceedings for cancellation if he deems fit.

Blocking of GSTR-1 due to non-filing of GSTR-3B

  • Similar to the Rule for blocking of e-way bills in case of non-filing of GST returns, a new Rule 59(5) has been inserted wherein a taxpayer shall not be allowed to file GSTR-1 if he fails to file GSTR-3B for two subsequent months. In case GSTR-1 is to be filed quarterly, then GSTR-1 is not allowed if GSTR-3B is not filed for the preceding tax period.
  • Also, a taxpayer who is restricted from availing ITC as per Rule 86B shall not be permitted to file GSTR-1, where GSTR-3B is not filed for the preceding tax period.

Other key amendments

  • The time limit available to the officer to approve new GST registration has been revised to 7 working days, from the current limit of 3 working days;
  • The validity of the e-way bill has been reduced by way of an increase in distance to be covered by the conveyance per day. As per the revised norms, an e-way bill will be valid for 1 day for every 200 kilometers distance or part thereof, instead of the erstwhile limit of 100 kilometers;
  • An additional restriction has been imposed whereby taxpayers whose registration is suspended will not be able to generate Part A of the e-way bill;
  • The Finance Act, 2020 had introduced several amendments to the CGST Act, some of which were yet to be notified. Now, the Government Notification No. 92/2020-Central Tax dated 22 December 2020 has made the following key amendments effective from 1 January 2021:
    • The time limit for availing ITC by the recipient in relation to a debit note issued by the supplier has been de-linked from the date of the original invoice. In other words, the recipient can now claim ITC pertaining to a debit note till September of the year following the year in which such debit note has been issued;
    • Earlier, penal and imprisonment provisions for certain offences were applicable only to the person committing those offences. Now, the scope has been expanded to include persons who cause to commit and retain the benefits arising out of such offences, i.e., recipients causing the suppliers to issue an inflated invoice and claiming higher ITC, brokers involved in frauds related to ITC, etc.
    • Imprisonment provisions have been amended to include taxpayers availing fraudulent ITC without any invoice/bill;
    • Schedule II of the CGST Act has been amended whereby the phrase "whether or not for a consideration" has been deleted from Para 4 of the said Schedule, which provides for categorization of transfer of business assets into 'supply of goods' and 'supply of services.' It appears that this amendment intends to harmonize Schedule II with the 'supply' definition, as activities to be treated as 'supply' even in the absence of 'consideration' have been specifically provided under Schedule I.

Our Comments

The powers granted to GST officers to suspend GST registrations if there is a mismatch in the return or any other analysis as recommended by the GST council seem to be very wide. This could have a serious disruption in the businesses of taxpayers since suspension shall not allow such taxpayers to issue tax invoices and generate e-way bills apart from not being able to undertake GST compliances. This could virtually bring the business to a standstill until the suspension is revoked. What is more intriguing is another amendment that grants power to suspend GST registration without giving any opportunity to the taxpayer to put across its point of view, i.e., without following principles of natural justice. This may have a far-reaching impact if these unfettered powers are not exercised judiciously. Something similar was witnessed when GST credit was being blocked in terms of Rule 86A, and the taxpayers were after the GST authorities with all sorts of reconciliation so that credit is allowed to be utilized for discharging GST. This provision, on the face of it, looks more stringent as it stops the business.

The government seems to be finding out ways and means to identify fraudsters and impose novel conditions. One such measure is Rule 86B, which requires taxpayers (subject to certain exceptions) to pay 1% of tax liability in cash. However, excluding taxpayers where the people controlling the organization are discharging income tax perhaps show that some data analytics is at play. However, it is likely that some of the honest taxpayers may also come into this net. For instance, taxpayers making losses due to pandemic resulting in non-payment of Income-tax may be hit by this change. For these taxpayers, it would be a mighty blow adding to the financial crunch faced by them.

Although biometric-based Aadhar authentication shall reduce the number of dummy/fraudulent GST registrations, the same shall add to the practical difficulties being faced by genuine applicants. Further, the requirement to visit the facilitation center for verification of original documents disrupts the government's intention of 'Less Government, More Governance,' tax digitization, etc. 

The reduction of the limit of claimable ITC from 110% to 105% of invoices furnished in GSTR-2A is in line with the government's intention to move to a regime of taking ITC only on a matching basis. Perhaps, the timing may be a bit quicker than the expectation in light of the pandemic.

The reduction in time limits granted (by doubling the daily minimum travel distance for vehicles) for the movement of goods under the cover of an e-way bill may create further hardships at various check posts and is expected to give rise to multiple litigations.

Given the various cases of fraudulent practices under the GST law, the government's intent behind enforcing stricter mechanisms may be justifiable. However, in its quest to catch a few fraudulent businesses, the government should also ensure that its decisions do not result in unnecessary hurdles for genuine taxpayers who constitute an overwhelming majority of businesses registered under GST.

We have already seen large-scale litigation in the form of writ petitions challenging the vires of various provisions and high handed approach by tax authorities such as in cases of e-way bill. These changes to control the fraud may result in hardships for honest taxpayers. The high handed approach at ground level is likely to cause a surge in cases where taxpayers will have to knock on the doors of High Courts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.