The Central Board of Indirect Taxes and Customs (CBIC) issued a circular on June 26, 2024, to clarify the time limit for availing of Input Tax Credit (ITC) under the Central Goods and Services Tax (CGST) Act, 2017, particularly concerning supplies received from unregistered persons under the Reverse Charge Mechanism (RCM). This blog post will break down the circular in simple terms, making it easy for individual taxpayers and business owners to understand the new guidelines.
What is Reverse Charge Mechanism (RCM)?
Under the Reverse Charge Mechanism, the recipient of goods or services is liable to pay GST instead of the supplier. This typically applies to supplies received from unregistered persons or specific notified goods and services.
The Issue at Hand
Businesses have been confused about the time limit for claiming ITC on RCM supplies received from unregistered persons. The core question is: Should the ITC be availed in the financial year when the supply was obtained or in the year when the recipient issued the invoice and paid the tax?
Key Points from the Circular
- Clarification Sought by Trade and Industry:
- Businesses wanted clarity on whether the time limit for claiming ITC should be based on the year the supply was received, or the year the invoice was issued by the recipient under RCM.
- Relevant Provisions of the CGST Act:
- Section 16(2)(a): ITC can only be claimed if the recipient has a tax invoice, debit note, or other prescribed tax documents.
- Rule 36(1)(b): ITC should be availed based on an invoice issued per Section 31(3)(f), provided the tax has been paid.
- Section 31(3)(f): A registered person must issue an invoice for supplies received from unregistered persons and pay the tax under RCM.
- Time Limit for ITC Availment:
- Before the Finance Act, 2022: ITC could be claimed up to the due date for furnishing the return for September of the following financial year or the date of furnishing the annual return, whichever is earlier.
- After the Finance Act, 2022: The time limit is extended to November 30 of the following financial year or the date of furnishing the annual return, whichever is earlier.
- The conclusion from the Circular:
- For RCM supplies from unregistered persons, the relevant financial year for availing ITC is the year in which the recipient issues the invoice and pays the tax.
- If the recipient delays issuing the invoice and paying the tax, they must pay interest on the delayed payment.
- Delayed issuance of the invoice may also attract penalties under Section 122 of the CGST Act.
Simplified Explanation
Imagine you run a business and receive services from an unregistered supplier in January 2023. You need to pay GST on this service under RCM. If you issue the invoice and pay the tax in April 2023, you can claim ITC up to November 30, 2024. However, if you delay this process and issue the invoice and pay the tax in July 2023, you can still claim ITC up to November 30, 2024, but you will also have to pay interest for the delayed tax payment. If you issue the invoice even later, say in December 2023, you will face penalties along with interest.
Practical Implications
- For Businesses:
- Ensure timely issuance of invoices for RCM supplies from unregistered persons.
- Pay the GST on such supplies promptly to avoid interest and penalties.
- Maintain clear records to substantiate the timing of invoice issuance and tax payments.
- For Tax Professionals:
- Advise clients on the importance of timely compliance with RCM provisions.
- Help businesses set up internal processes to ensure adherence to the new guidelines.
Conclusion
This clarification aims to streamline the process of claiming ITC on RCM supplies from unregistered persons, reducing ambiguities and potential disputes. By following these guidelines, businesses can ensure compliance and avoid unnecessary financial liabilities.
For any assistance with GST compliance or to understand these provisions better, reach out to Efiletax. Our experts are here to help you navigate the complexities of tax laws and ensure smooth tax filing.