Analysis of New GST Rule 37A – No immediate ITC reversal for suppliers failure to file GSTR-3B

With effect from December 26, 2022, Rule 37A of the CGST Rules 2017 has been added by the CBIC via Notification 26/2022 Central Tax. In the five years after the introduction of GST, several notices have been sent, and beneficiaries of goods and services have reversed numerous ITCs when providers failed to file the GSTR-3B. The department frequently cited Section 16(2)(c) of The CGST Act 2017 in opposition, arguing that the requirement that the relevant Tax should have been paid in order to get an ITC has not been met in such circumstances. Due to the fact that suppliers were already present and that the department should initiate recovery actions against the suppliers rather than the recipients, this was overturned by the courts in a number of rulings, including D. Y. Beathel Enterprises. If the suppliers fail to pay, the department may approach the beneficiaries to try and recoup the lost taxes.

Additionally, there may have been instances where the beneficiaries actually did reverse the ITC, but there was no way for them to do so after the supplier had already paid the taxes. As a result, taxes were collected by the department without a legal mandate, which was against Article 265 of the Indian Constitution.

Now that Rule 37A has been added, the real recipients will feel a little better. Rule 37A provides the following:

“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-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.

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 following is an analysis of the key elements of the rule:

1. B2B recipients are given protection under section 37A in that they are not required to immediately reverse ITC on suppliers who failed to file their GSTR 3B.
2. Using FY 22–23 as an example, if suppliers do not submit their GSTR 3B documents by September 30, 2023, the recipients must reverse their ITC by November 30, 2023.
3. There is also no need to pay interest during the ITC pleasure period.
4. However, interest must be paid after November 30, 2023 if the ITC is not reversed in the return for November 2023. It is still unclear if interest must be paid starting with the ITC application process or merely for the time period following November 30, 2023. Our legal argument is that even under this situation, interest must only be paid after November 30, 2023.
5. In addition, after that, if the supplier files its GSTR 3B, the recipient may reclaim the ITC in accordance with Rule 37.
6. Such ITC claims will not be subject to any time limitations.
7. The government may, however, immediately reject the matching ITC under Section 38(2)(b) of the CGST Act 2017 if the supplier files its GSTR 3B but there is a mismatch between its GSTR 1 and GSTR 3B of the suppliers by more than a specific percentage.
8. If the supplier’s GSTIN is deleted or suspended ab initio during the interim period, would this rule still apply? According to our legal argument, yes, as long as the supplier files GSTR 1 and receives the benefit of the regulation.
9. Another concern is whether the ITC can be recovered if recipients had earlier reversed it because suppliers had failed to file GSTR 3B forms, but now that they have, the ITC can be recovered for those earlier reversals. – According to our legal argument, the ITC may be reclaimed in accordance with Rule 37A’s second proviso, which will take effect on December 26, 2022.

Overall, even though there will always be questions about amendments, this one is welcome and will benefit taxpayers who were having trouble understanding notices in this case.

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