The Central Board of Indirect Taxes and Customs (CBIC) has recently issued clarifications regarding the interpretation and application of sub-sections (5) and (6) of Section 16 of the Central Goods and Services Tax Act, 2017 (CGST Act). These clarifications, effective retroactively from July 1, 2017, were introduced through the Finance (No. 2) Act, 2024, and significantly extend the time limit for availing Input Tax Credit (ITC) under specific circumstances. This article provides an in-depth examination of the CBIC’s clarification and its implications for taxpayers.

Background: Understanding the CGST Act’s ITC Provisions

Sub-section (4) of Section 16: General Time Limit for Claiming ITC

Sub-section (4) of Section 16 of the CGST Act imposes a time limit for claiming ITC on invoices or debit notes. According to the provision, a registered person cannot claim ITC for any invoice or debit note after:

  1. November 30: following the financial year to which the invoice pertains; or

  2. Upon filing of the annual return, whichever is earlier.

This restriction is aimed at ensuring that taxpayers claim their ITC in a timely manner, thereby promoting compliance with GST regulations. However, there was an exception made for invoices from the financial year (FY) 2017-18, where taxpayers could claim ITC until March 2019 if the necessary details were provided.

Finance (No. 2) Act, 2024: Retrospective Changes to ITC Rules

The Finance (No. 2) Act, 2024, introduced two key sub-sections—(5) and (6)—to Section 16 of the CGST Act. These provisions provide specific relief to taxpayers by retrospectively extending the time limit for claiming ITC, especially in cases involving errors, delayed filings, or reinstated GST registrations.

Clarification on Sub-section (5) of Section 16: Extended ITC Claim Period

Sub-section (5) of Section 16 allows taxpayers to claim ITC for invoices related to the financial years 2017-18 to 2020-21, provided the ITC is claimed before November 30, 2021. This provision was introduced to offer relief to taxpayers who were unable to claim ITC within the standard time limit due to genuine delays or errors in filing returns.

The CBIC’s clarification acknowledges the challenges faced by taxpayers during the initial implementation of GST and seeks to provide a mechanism to claim ITC retrospectively, thus aligning with the principle of fairness.

Key Takeaways from Sub-section (5):

  • Applicable Years: The extended ITC claim period covers invoices from FY 2017-18 to FY 2020-21.

  • Deadline: The ITC must have been claimed by November 30, 2021, for these specific invoices.

  • Relief for Taxpayers: Taxpayers who faced difficulties in claiming ITC within the original time limit can benefit from this retrospective extension.

Clarification on Sub-section (6) of Section 16: ITC for Reinstated GST Registrations

Sub-section (6) of Section 16 provides relief for taxpayers whose GST registrations were canceled but later reinstated. According to this provision, taxpayers can claim ITC for relevant invoices even if the registration was canceled, as long as the ITC is claimed within the prescribed time limit following the reinstatement.

This sub-section aims to address situations where a taxpayer’s registration was canceled due to non-compliance, but upon rectification and reinstatement, the taxpayer is allowed to reclaim ITC on past invoices.

Important Aspects of Sub-section (6):

  • ITC for Canceled Registrations: Taxpayers whose registrations were canceled but later reinstated can claim ITC for the relevant period.

  • Time-bound Relief: The ITC must be claimed within a specific time frame after the reinstatement of the registration.

  • Retrospective Application: The CBIC’s clarification confirms that this provision is effective from July 1, 2017, thereby covering past instances of registration cancellations and reinstatements.

Notification No. 22/2024: Special Rectification Procedure

On October 8, 2024, the CBIC issued Notification No. 22/2024, outlining a special rectification procedure for taxpayers who received orders under sections 73 or 74 of the CGST Act for incorrectly availed ITC. This rectification procedure is intended for taxpayers who have not filed an appeal against the original order but now seek to rectify their ITC claim based on the newly inserted provisions in sub-sections (5) and (6) of Section 16.

Applicability of the Rectification Procedure:

  • Taxpayers Who Have Not Filed Appeals: If a taxpayer has not appealed an order issued under sections 73 or 74 of the CGST Act, they can apply for rectification based on the new provisions.

  • Cases of Wrong ITC Availment: The rectification procedure applies specifically to cases where ITC was wrongly availed due to non-compliance with the provisions of sub-section (4) of Section 16.

Scenarios Addressed by the CBIC’s Clarification

The CBIC’s circular addresses several possible scenarios where taxpayers may seek to claim ITC or rectify past errors based on the retrospective application of sub-sections (5) and (6) of Section 16. Below, we outline the key scenarios:

1. Where No Demand Notice Has Been Issued Under Sections 73 or 74

If investigations into wrong availment of ITC have been initiated but no demand notice under sections 73 or 74 has been issued, taxpayers can still avail ITC under sub-sections (5) or (6) of Section 16. In such cases, the tax authorities are required to recognize the retroactive nature of these sub-sections and take appropriate action.

2. Where a Demand Notice Has Been Issued, But No Order Has Been Passed

In cases where a demand notice has been issued under sections 73 or 74, but no final order has been passed, the CBIC has clarified that the Adjudicating Authority must consider sub-sections (5) and (6) and issue an appropriate order that accounts for the taxpayer’s eligibility to claim ITC retrospectively.

3. Where an Order Has Been Issued, and an Appeal Is Pending

For cases where an order has already been issued under sections 73 or 74 and an appeal is pending before the Appellate Authority, the CBIC’s circular mandates that the Appellate Authority must take the new provisions into account when issuing a final order.

4. Where No Appeal Has Been Filed, and an Order Is Final

For taxpayers who did not appeal an order confirming a demand for wrongly availed ITC, they may now apply for rectification if the ITC is eligible under sub-sections (5) or (6). The application must follow the special procedure outlined in Notification No. 22/2024, and it must be submitted within six months of the notification date.

Key Compliance Requirements for Taxpayers

Taxpayers seeking to rectify past ITC claims or avail benefits under the newly clarified provisions must adhere to specific compliance requirements:

  1. Application for Rectification: Taxpayers must file an application for rectification electronically on the GST portal within six months from the notification date.

  2. Mandatory Information: The application must include all relevant information, including details of the original demand confirmed due to the wrong availment of ITC.

  3. Decision Timeline: The officer responsible for the original order is required to issue a rectified order within three months of receiving the application.

Forms for Rectified Orders:

  • For orders issued under sections 73 or 74, the rectified order must be uploaded in FORM DRC-08.

  • For orders issued under sections 107 or 108, the rectified order must be uploaded in FORM GST APL-04.

Conclusion: A Significant Relief for Taxpayers

The CBIC’s clarification on sub-sections (5) and (6) of Section 16 of the CGST Act marks a significant development in the GST landscape, offering relief to taxpayers who faced difficulties in claiming ITC due to procedural errors, delayed filings, or canceled registrations. By extending the time limit for ITC claims and introducing a special rectification procedure, the CBIC aims to promote fairness and ensure that taxpayers can rectify past errors without undue penalties.

Taxpayers are advised to review the CBIC’s circular in detail and assess whether they are eligible to benefit from the retrospective provisions. The window for applying for rectification is limited, and timely action is critical to ensure compliance and avoid potential disputes with tax authorities.

CBIC Circular No. 237/31/2024 – GST

Clarification regarding Input Tax Credit (ITC) Provisions Under Sections 16(5) and 16(6) of CGST Act.