CBIC Issues Clarification on ITC u/s 16(5) and 16(6) of GST Act [Read Circular]

The Central Board of Indirect Taxes and Customs ( CBIC ) has issued clarifications regarding sub-sections (5) and (6) of Section 16 of the Central Goods and Services Tax Act, 2017 ( CGST Act ), effective July 1, 2017.

This change, introduced via the Finance (No. 2) Act, 2024, retrospectively extends the time limit for availing Input Tax Credit ( ITC ) in specific cases.

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The Sub-section (4) of the Section 16 specifies that a registered person cannot claim ITC for any invoice or debit note beyond November 30 following the financial year to which it pertains, or upon filing the annual return, whichever is earlier. However, there is an exception for invoices from FY 2017-18 filed by March 2019 if details were uploaded by the supplier.

The Sub-section (5) allows ITC claims for invoices related to the financial years 2017-18 to 2020-21 if the return is filed by November 30, 2021. And, the Sub-section (6) provides for ITC claims if a taxpayer’s registration is canceled but subsequently reinstated, allowing ITC for relevant invoices filed within specific timeframes.

Additionally, Section 150 of the Finance (No. 2) Act, 2024, clarifies that no refunds will be granted for taxes paid or ITC reversed due to these retrospective amendments.

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However, vide Notification No. 22/2024, issued on October 8, 2024, outlines a special rectification procedure for taxpayers who received orders under sections 73 or 74 of the CGST Act for incorrectly availed ITC.

Taxpayers who have not appealed these orders may apply for rectification based on the newly inserted provisions.

The following action may be taken by the tax authorities and/ or the taxpayers in various scenarios for availment of benefit on account of retrospectively inserted provisions of sub-section (5) or sub-section (6) of section 16 of the CGST Act:

Where no demand notice/statement has been issued under section 73 or section 74 of the CGST Act:

The board clarified that if investigations regarding wrong availment of ITC have been initiated but no demand notice under sections 73 or 74 of the CGST Act has been issued, taxpayers can still avail ITC under sub-sections (5) or (6) of section 16 of the CGST Act.

In such cases, the proper office must recognize these sub-sections, retroactively effective from July 1, 2017, and take appropriate action. This includes instances where an intimation in FORM DRC-01A has been issued for denying ITC due to alleged contraventions of sub-section (4), provided no demand notice has been issued.

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Where demand notice/ statement under section 73 or section 74 of CGST Act has been issued but no order under section 73 or section 74 of CGST Act has been issued by the Adjudicating Authority: 

The CBIC clarified that in these cases, the Adjudicating Authority must acknowledge sub-sections (5) and (6) of section 16 of the CGST Act, effective retroactively from July 1, 2017, and issue the necessary order under sections 73 or 74 of the CGST Act.

Where order under section 73 or section 74 of the CGST Act has been issued and appeal has been filed under section 107 of the CGST Act with the Appellate Authority but no order under section 107 of the CGST Act has been issued by the Appellate Authority:

The Board clarified that, in these instances, the Appellate Authority is required to recognize sub-sections (5) and (6) of section 16 of the CGST Act, which were retrospectively implemented on July 1, 2017, and to issue the appropriate order under section 107 of the CGST Act.

Where order under section 73 or section 74 of the CGST Act has been issued and Revisional Authority has initiated proceedings under section 108 of the CGST Act, but no order under section 108 of the CGST Act has been issued by the Revisional Authority:

The CBIC clarified that the Revisional Authority must recognize sub-sections (5) and (6) of section 16 of the CGST Act, which were retrospectively effective from July 1, 2017, and issue the appropriate order under section 108 of the CGST Act.

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Where order under section 73 or section 74 of the CGST Act has been issued but no appeal against the said order has been filed with the Appellate Authority, or where the order under section 107 or section 108 of the CGST Act has been issued by the Appellate Authority or the Revisional Authority but no appeal against the said order has been filed with the Appellate Tribunal: 

For this query, the board clarified that taxpayers who have received an order under sections 73, 74, 107, or 108 of the CGST Act confirming a demand for wrong availment of input tax credit due to a violation of sub-section (4) of section 16 can now apply for rectification. This applies if the input tax credit is available under sub-sections (5) or (6) of section 16, and no appeal against the order has been filed.

The application for rectification should follow the special procedure outlined in section 148 of the CGST Act as per Notification No. 22/2024 – Central Tax, issued on October 8, 2024, and must be submitted within six months from the notification date.

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Taxpayers can file an application for rectification electronically at www.gst.gov.in.

The board also clarified that taxpayers must include the information specified in Annexure A of Notification No. 22/2024- Central Tax while filing a rectification application. This includes details of any demand confirmed in the original order related to wrong input tax credit claimed due to a violation of subsection (4) of section 16 of the CGST Act, which is now eligible under subsections (5) or (6) of the same section.

The application for rectification will be handled by the officer who issued the original order. This officer is expected to decide on the application and issue an order within three months of the application date. If the officer makes any rectification, they must upload a summary of the rectified order electronically: in FORM DRC-08 for orders under sections 73 or 74, and in FORM GST APL-04 for orders under sections 107 or 108.

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When reviewing the application, the officer must also consider other grounds for denying input tax credit beyond the violation of subsection (4) of section 16, as noted in the relevant notice issued under sections 73 or 74. If the rectification negatively impacts the taxpayer, the officer must adhere to the principles of natural justice.

Taxpayers may appeal against any rectified order under sections 107 or 112 of the CGST Act within the specified time frame. According to section 150 of the Finance (No. 2) Act, 2024, no refund of tax or reversal of input tax credit will be available if these were previously paid or reversed due to violations of subsection (4) of section 16, even if the input tax credit is now eligible under subsections (5) or (6), stated the board in the circular.

The rectification application for orders under sections 73, 74, 107, or 108 can only be filed under the special procedure outlined in Notification No. 22/2024-Central Tax within six months from the notification date. This applies only if the order involves issues of wrong input tax credit as per subsection (4) and where such credit is now eligible under subsections (5) or (6). If no relevant issues are present, taxpayers must file for rectification under section 161 of the CGST Act within the specified time.

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If a taxpayer submits a rectification application under the special procedure, but it is determined that the order does not address any violations of subsection (4) of section 16, the officer will reject the application, noting that it does not fall under Notification No. 22/2024-Central Tax, and state the reasons for the rejection.

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