Complication : Rule 36(4) GST Rules, ,2017

Complication has crept into GST procedures with implementation of Rule 36(4) with effect from 9.10.2019.  Clarifications issued vide circular number 123/42/2019 dated 11.11.2019 does not answer all questions and still there are many to be answered.  To name a few

1. A manufacturer avails credit based on the 20% rule on an vendor invoice of Rs.100 @ Rs.20.  The vendor never uploads the invoice.  Is interest payable when reversal of this Rs.20 had to be done when ITC availment period expires?  The Government has as per law allowed 20% credit so does it allow to reverse it without interest?
2. Manufacturer / service provider will be affected when purchasing from a vendor filing quarterly return.  No clarification on this point
3. Does this 20% rule work across financial years?

Let us now move into a major complication.  Explanation 4 & 5 of the circular dated 11.11.2019 explains how ITC should be availed under Rule 36(4).  A plain reading gives a result as  below for a manufacturer

In this illustration there  are 10 suppliers.  Column Booked refers to purchase invoices booked in manufacturer books, column GST-2A reflects suppliers filing of GSTR-1.  

Month1 - manufacturer books bills worth of GST Rs.10,500 and GST-2A reflects Rs.5,500 so his ITC for the month will be Rs.6,600 - leaving an un-availed ITC gap of Rs.3,900 (Rs.10,500 - 6,600)

Month 2 - manufacturer books bills worth of GST Rs.13,000 and GST-2A reflects Rs.9,500 so his ITC for the month will be  Rs.11,400 - leaving an un-availed ITC gap of Rs.5,500 (Rs.10,500 + Rs.13,000 - Rs.6,600 - Rs.11,400)

Month 3 - manufacturer books bills worth of GST Rs.18,000 and GST-2A reflects Rs.12,000 so his ITC for the month will be  Rs.14,400 - leaving an un-availed ITC gap of Rs.9,100 (Rs.10,500 + Rs.13,000 + Rs.18,000 - Rs.6,600 - Rs.11,400 - Rs.14,400)

Month 4 - manufacturer books bills worth of GST Rs.17,500 and GST-2A reflects Rs.32,000 (all vendors have filled all their invoice in GSTR-1) so his ITC for the month will be  Rs.17,500 as credit is restricted to bill booked (explanation in the circular "The additional amount of ITC availed shall be limited to ensure that the total ITC availed does not exceed the total eligible ITC"). - leaving an un-availed ITC gap of Rs.9,100 (Rs.10,500 + Rs.13,000 + Rs.18,000 + Rs.17,500 - Rs.6,600 - Rs.11,400 - Rs.14,000 - Rs.17,500).

In short total bill booked in 4 months Rs.59,000 but credit availed only Rs.49,000 leaving a gap of Rs.9,100 un-availed credit.   This is because of complexity of working when we do a month on month reconciliation.  

To avoid this a manufacturer or service provider should revert to a cumulative working of bills booked and ITC availed.  See table below for a cumulative working

Cumulative working in Month 4 show ITC eligibility as Rs.59,000 and ITC availed on a cumulative value as Rs.59,000 (monthly credit is shown in the last row).  

Conclusion

Rule 36(4) is quite a complicated working scheme and assesses need to be careful in working considering volume of transactions handled.  Best option is do not opt for this 20% higher credit if cashflow is not a problem and avail credit off only the credit available as per GSTR-2A, this will make life simpler and calculations more easy to follow.