Taxpayers Under Scrutiny as Circular 170 Flags Ineligible ITC in GSTR-3B

The Central Goods and Services Tax (CGST) department issued Circular No. 170/02/22, dated 06.07.2022, to ensure accurate reporting by registered persons in Forms GSTR-3B and GSTR-1. This aims to support proper accounting and precise settlement of funds between the Central and State Governments.

Currently, the Central Goods and Services Tax (CGST) Department across the country is issuing notices with the following observations:

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ITC Reversal Based on the Following Computation

• Be sure to disclose the details from Table 8(D) of GSTR-9 in Table 4D(2) of GSTR-3B, marking them as ineligible Input Tax Credit (ITC).
• In certain states, taxpayers are required to reclaim the amounts in GSTR-3B Table 4B(5), reverse them in Table 4B(1), and subsequently disclose the ITC in GSTR-3 B Table 4D(2).

Let's Review the Key Pointers

1. If, in earlier tax periods before July 2022, disclosures under the ineligible category in GSTR-3B Table 4D(1) were not made, this would be non-compliance. However, taxpayers may argue that explicit guidance like that in Circular 170 was not available at that time.
2. From the July 2022 tax period onward, after Circular 170 took effect, such a plea is unlikely to be accepted, especially after the notification and increased awareness of the circular’s requirements in November 2022.
3. Reclaiming and reversing old Input Tax Credit (ITC) may raise time-bar issues under Section 16(4) of the CGST Act, 2017. Such reclamations may be challenged, while any reversal could be construed as an admission. Further, SGST Departments may insist on disclosures. However, CGST Anti-Evasion units may view these as non-compliance with Section 16(4) of the CGST Act, 2017. Therefore, taxpayers should exercise due caution.
4. Under the proviso to Section 39(9) of the CGST Act, 2017, any attempt to rectify omissions or errors in returns after the specified deadline is subject to strict legal consequences. As a result, whether such a request can survive judicial scrutiny is an open question that adds a layer of suspense to the proceedings.

Notwithstanding the above, it is now evident that GSTR-3B return filing cannot be treated as a mere formality. Accurate disclosures help taxpayers avoid litigation, while incorrect reporting may expose them to legal disputes. Taxpayers who have not complied with Circular 170 should promptly begin filing returns correctly. Failure to do so may not only result in revenue loss to State Governments but also attract penalties for non-compliance.

Read more for GST Circular No. 170/02/22