The Government has issued slew of notifications to amend the GST rules. An attempt is made in this article to critically examine the notifications issued after the GST Council meeting to bring out the controversies and complexities of the provisions made therein.

Notification No. 49/2019

Firstly and most intriguingly, ‘CGST (Sixth Amendment) Rules, 2019’ are framed and the amendments to the various provisions of the CGST Rules, 2017 are carried out, is issued under S.164 of the CGST Act, 2017. For the ease of reference, S.164 is reproduced below:

“S.164 (1) The Government may, on the recommendations of the Council, by notification, make rules for carrying out the provisions of this Act.

(2) Without prejudice to the generality of the provisions of sub-section (1), the Government may make rules for all or any of the matters which by this Act are required to be, or may be, prescribed or in respect of which provisions are to be or may be made by rules.

(3) The power to make rules conferred by this section shall include the power to give retrospective effect to the rules or any of them from a date not earlier than the date on which the provisions of this Act come into force.

(4) Any rules made under sub-section (1) or sub-section (2) may provide that a contravention thereof shall be liable to a penalty not exceeding ten thousand rupees”.

[Emphasis provided]

It will be evident from the careful perusal of S. 164 that in terms of sub-section (1) thereof, the Central Government is empowered to make, by notification, rules for carrying out the provisions of the Act. Needless to say, such powers vested in the Central Government ‘to make rules’ would include the powers ‘to amend the rules’ in any manner as deemed fit. However, such notification making (or amending) the rules can be issued by the Central Government only on the recommendation of the Council.

This being the case, it is rather shocking that there is absolutely no mention in the subject notification that it has been issued on the recommendation of the Council! This puts a very big question mark over the very validity of the notification and in fact, may render it invalid and without authority of law. It may be pointed out here that the powers conferred upon the Central Government under sub-section (2) and (3) are for specified purpose only and do not exist independently but flow from the powers conferred on the Central Government under sub-section (1). Under these circumstances, the subject notification could not have been issued by the Central Government without recommendation of the Council. If these amendments are not discussed in the GST Council meeting, the very validity of notification No. 49/2019 – CT is in question. Some of the amendments made by the notification have far reaching implications.

Against the backdrop of the above root issue, the nature and implications of certain significant amendments made by the present notification are briefly discussed hereinbelow:

1. Suspended registrants not to issue tax invoice and not to charge tax:

R. 21 A of the Central Goods and Services Tax Rules, 2017 – relevant extract:

“2. a) in sub-rule (3), the following explanation shall be inserted, namely:-

“Explanation.-For the purposes of this sub-rule, the expression “shall not make any taxable supply” shall mean that the registered person shall not issue a tax invoice and, accordingly, not charge tax on supplies made by him during the period of suspension”.

Comment:

The provision deals with ‘suspension of registration’ of a taxpayer in certain circumstances as specified in R. 21A. Sub-rule (3) of Rule 21A provides that a registered person shall not make any taxable supply during the period of suspension and shall not be required to file any return under S. 39 of the CGST Act, 2017. Now, the explanation is added to the effect that the suspended registrant can make taxable supply but shall not issue a tax invoice and shall not charge on supplies made by him during the period of suspension.

This is a strange explanation! Does it mean that a registered person, during the period of suspension, can make taxable supply, but cannot issue tax invoice nor charge tax on it? If so, how will he be able to make the taxable supply in the first place? And if the intention is to not allow him to make the taxable supply during the period of suspension then where was the need for such an explanation? If the registered person is allowed to make taxable supply during the period of suspension but without issue of a tax invoice and without charging a tax on it (a very incongruous proposition, indeed!), will it not create complications at a later date in the recovery of tax if the suspension is upheld and the registration is finally cancelled?

2. Restriction on availment of input tax credit:

In R. 36, after sub-rule (3), the following sub-rule shall be inserted, namely:-

“(4) Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 20 percent of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37″.

Comment:

Firstly, the amendment straight away restrict the input tax credit to 20% of eligible credit shown in GSTR 2A by disregarding or over looking the provisions of S. 42. S. 42 set out elaborate procedure if when the inward supply of registered person does not match with the corresponding details of outward supply furnished by the corresponding registered person (supplier) in his valid return for the same tax period or any preceeding tax period.

Secondly, S. 38 r.w. R. 60 provide opportunity to the supplier of input or input service or both to rectify the errors by way of furnishing the same in Form GSTR 2. The said form is kept in abeyance.

Thirdly, S. 43A prescribe the procedure for furnishing return and availing input tax credit with the non-obstante clause of over-riding of S. 41, 42 & 43. This provision has not yet seen the light of the day and therefore prescribing the artificial limit in case of un-matched credit is premature.

Fourthly and most importantly, S. 16 pertaining to eligibility and condition for taking input tax credit does not prescribe or authorize the Central Government to allow partial credit.

In sum and substance it can be said that allowing partial credit of 20% of the eligible credit is outside the authority of law and susceptible to challenge.

Now let us come to the practical issues in the artificial limit to the credit:

• Supposing Mr. X, a registered person has 100 invoices of various suppliers having different rate of tax during the month of October 2019. There is mis-match in case of 20 invoices of some of the suppliers whose supplies attract different rate of tax. Mr. X limits his credit to the extent of 20% of value of eligible ITC appearing in 2A. The rest being carried forward in his books. In the month of Nov. 2019, some of the suppliers of which the credit was not available in the earlier month, files their returns or make amendment in the subsequent period. On what basis Mr. X will be allowed credit against the invoices of these supplies for the remaining credit of 80%? This exercise can go on infinitely on month on month basis. Whether Mr. X will need to keep track of partial allowance from supplier to supplier and if so, whether it is feasible to keep a track of claimed, unclaimed or partially claimed credit of each invoice of each supplier? This a herculean task, almost impossible probably being not thought of by the famers of the notification.

• In the above case if the supplier corrects his return in the subsequent period but Mr. X is eligible for 20% of credit in the current period. Does it mean that he will have to pay interest on the shortfall arising out of the restricted credit?

• What will happen if Mr. X is required to file a monthly return, however if some of the supplier are required to file quarterly return?

• Payment under RCM is not reflected in GSTR 2A. Whether the credit will be lost as it appears from the amendment.

3. A very significant amendment validating GSTR 3B retrospecti-vely from 01.07.2017:

In R. 61 substitution of sub-rule(5) and omission of sub-rule(6):

Substituted sub-rule (5):

“(5) Where the time limit for furnishing of details in FORM GSTR-1 under section 37 or in FORM GSTR-2 under section 38 has been extended, the return specified in sub-section (1) of section 39 shall, in such manner and subject to such conditions as the Commissioner may, by notification, specify, be furnished in FORM GSTR-3B electronically through the common portal, either directly or through a Facilitation Centre notified by the Commissioner: Provided that where a return in FORM GSTR-3B is required to be furnished by a person referred to in sub-rule (1) then such person shall not be required to furnish the return in FORM GSTR-3.”

Comment:

The Government faced a piquant challenge of loosing a very sizeable revenue and derailment of the whole process when the Hon’ble Gujarat High Court granted STAY on recovery proceedings of late fees for late filing of Form GSTR 3B for the period 01.07.2017 to 30.09.2018 for which the returns are furnished between 01.07.2017 to 21.12.2018 pronouncing that there is a strong prima facie case that the return in Form GSTR 3B is not a valid return as provided u/s. 37, 38 & 391. To ward off this challenge, the Government amended rule 61 by substituting sub-rule (5) and omitting sub-rule (6) to validate the return in Form GSTR 3B retrospectively from 01.07.2017. The substituted R. 5 is as follows:

4. Notification No. 20/2019 – CT (R) amending notification No. 11/2017 – CT (R):

The most clueless amendment – in Entry 26:

Insertion in clause (i) by way of in column (3), after item (ia) and the entries relating thereto in columns (3), (4) and (5):

“(ib) Services by way of job work in relation to diamonds falling under chapter 71 in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975);	0.75	–
(ic) Services by way of job work in relation to bus body building;	9	–
(id) Services by way of job work other than (i), (ia), (ib) and (ic) above;	6	–

Amendment in clause (iv)

Insertion of the brackets, words and figures “(ib), (ic), (id) after the words, (ia):

Clause (iv) now looks like,

Manufacturing services on physical inputs (goods) owned by others, other than (i), (ia), (ib), (ic), (id), (ii), (iia) and (iii) above”

9

–

Comment:

The way the entries are drafted, it is very difficult to make out the implications, particularly of the job work other than the types of job works prescribed in sub-clauses (i), (ia), (ib), (ic). These entries will have the rate of tax as shown in column 4 against them.

In respect of sub-clause (id), the rate of tax can be 6% CGST [as per clause (i)] or it can also be 9% CGST if clause (iv) is taken into account. This is because service by way of job work as prescribed in (id) of clause (i) and Manufacturing services on physical inputs (goods) owned by others is also essentially a job work. The only tie-breaker test could be the definition of job work as provided in S.2(68) of CGST Act.

“Job work means any treatment or process undertaken by a person on goods belonging to another registered person and the expression “job worker” shall be construed accordingly”.

Thus, it can be said that when a registered person sends goods for a treatment or process or manufacturing, it would amount to fall in sub-clause (id) liable for 6% CGST and when unregistered person sends such goods for similar activity it would be liable for 9% CGST. However, this is really an incongruous provision and possibly if Albert Einstien comes back to the earth, he may shrug his head in despair!!!