Claiming of provisional ITC under GST is a tricky part. It is essential that the businesses do it within the limits (gst input tax credit time limit) of Rule 36(4) of the CGST Act of 2017.
Provisional ITC is claimed based on the GST Input Tax Credit available in the GSTR-2A of the taxpayer.
From this short informative article, we have explained the process which allows the businesses to claim ‘Provisional Input Tax Credit under GST’ in a proper way.
Go through the complete article to understand the functioning of Rule 36(4)& to claim only the eligible provisional ITC under GST.
Rule 36(4) Of CGST Act, 2017
It’s important to address the question “What is Rule 36(4) of CGST Act, 2017?” first.
Let us first understand the provisions in this rule in the simplest terms.
The verbatim of the rule goes like,
‘that a taxpayer can claim provisional Input Tax Credit (ITC) only up to 5% of the eligible Input Tax Credit available in his GSTR-2A. The amount of eligible credit is taken from those invoices or debit notes, the details of which have been uploaded by the suppliers in the GSTR-2A only.’
To understand the rule in simplest terms, let us devise an example:
Let there be a supplier named “Perennial Cements Company” & the recipient be “GST Builders”.
The Supplier ‘Perennial Cements Company’ makes a sale to the recipient as follows:
Taxable Value
|
₹ 3, 00,000 |
GST Collected (18%) | ₹54,000
|
Total Amount Collected | ₹3, 54, 000
|
The Supplier then files his GSTR-1 monthly return for this transaction.
GSTR-1 is to be filed on the 10th of every month.
The entry of ₹3, 54,000 is made in the GSTR-1 of the Supplier.
Out of this, a GST of ₹54,000 is paid to the government by the Supplier through monthly GSTR-1.
In this transaction, the recipient “GST Builders” paid a GST of ₹ 54,000 to the supplier & the supplier then paid this as an outward liability to the government.
The recipient can now avail Input Tax Credit under GST on this transaction.
NOTE:
When the Supplier files his GSTR-1 for the current month, then the ITC details shall be auto-populated in the Recipient’s GSTR-2Aas well as the Recipient’s GSTR-2B.
The Recipient will now be able to claim his Input Tax Credit of ₹ 54, 000 as per his GSTR-2B.
This Recipient has 2 more suppliers. Following are the details:
Supplier | GST Paid to the Supplier | GSTR-1 status of the Supplier |
Pune Steel Corp. |
₹ 30,600 |
GSTR-1 filed correctly & on-time |
Maharashtra Traders | ₹ 14,800 | GSTR-1 NOT filed correctly
|
Now, as per the books of accounts of the recipient “GST Builders” the total available Input Tax Credit will be:
Supplier | ITC available as per books of accounts |
Pune Steel Corp. |
₹ 30,600 |
Maharashtra Traders | ₹ 14,800 |
Perennial Cement Company | ₹ 54, 000 |
But due to INCORRECT or DELAYED filing of GSTR-1 of one of the traders, his ITC available as per GSTR-2A looks as follows:
Supplier | GST Paid to the Supplier | ITC as per GSTR-2A of GST Builders |
Pune Steel Corp.
|
₹ 30,600 |
ITC available of ₹ 30,600 |
Maharashtra Traders | ₹ 14,800 | ITC Not auto-populated in recipient’s GSTR-2A
|
Perennial Cement Company | ₹ 54, 000 | ITC available of ₹54, 000 |
Total ITC available as per his GSTR-2A = 30,600 + 54,000 = ₹ 84,600
So, as per the eligible ITC available in the GSTR-2A of the business, how much provisional ITC can this business avail?
AS per Rule 36 (4) ,
Provisional ITC available = 5 % of ITC available in GSTR-2B of the taxpayer
The recipient can avail total ITC equal to:
₹ 84,600 + 5% of (84,600) = 84,600 + 4230 = ₹88,830
NOTE: In this example we have NOT considered the profit or the margin added by the Recipient when he sells it to the end customer.
How to deal with the defaulting suppliers under GST?
In the above example, we have seen that the supplier “Maharashtra Traders” defaulted at filing his GSTR-1. Because of this supplier, the recipient was NOT able to avail the ITC for that transaction in that particular month.
What to do in such situations?
- The first important thing that you need to do is to inform your defaulting vendor about this discrepancy.
- Notify the vendor about the delayed GSTR-1 filing and ask him to file his GSTR-1 at the earliest.
After the vendor files his pending GSTR-1,
- The balance ITC will be available in the subsequent month after the GSTR-1 filing of the supplier.
As of December 2021, the Provisional Input Tax Credit limit is capped to 5% the total ITC available in the GSTR-2B of the taxpayer.
Businesses should be extra careful while their ITC reconciliation routine as claiming of ineligible ITC can put your business in trouble.
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Businesses should use automated GST Reconciliation software like GSTHeroto to cater to all your GSTReconciliation requirements.
Know more about reversal of input tax credit under gst.
Synopsis
In this article, we have explained the calculation of Provisional Input Tax Credit under GST with an illustrative example.
Businesses must be cautious while availing of Provisional input tax Credit as incorrect reconciliation may lead you to claim ineligible Input Tax Credit under GST.
Currently, the Provisional ITC limit is fixed at 5% of the total ITC available in the GSTR-2B of the taxpayer. (Earlier GSTR-2A was considered to calculate the provisional ITC).
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