GST ITC Reclaim Denied Despite Tax Payment: KSCAA Flags Legal Gaps in Rule 37A, Writes to Finance Minister [Read Order]

The Karnataka State Chartered Accountants Association ( KSCAA ) has raised concerns over the denial of Input Tax Credit ( ITC ) to recipients, even in cases where the corresponding tax has ultimately been paid to the government. The association has written the representation to the Union Finance Minister.

The association stated that issue arises from the rigid interpretation of Rule 37A of the GST Rules, which currently allows ITC re-availment only if the defaulting supplier files the missing return specifically GSTR-3B.

KSCAA has called this limitation both impractical and legally inadequate, especially when tax is paid through alternative mechanisms such as DRC-03 or is recovered via enforcement actions.

The association stated that under Section 16(2)(c) of the CGST Act, ITC can be claimed by a recipient only if the tax has been paid to the government. However, in scenarios where the supplier defaults in filing returns or paying tax even after the recipient has paid the full invoice amount including GST, the ITC must be reversed by the recipient.

Currently, the recipient can only claim this credit under Rule 37A if the provider later files the GSTR-3B report. According to the association's written argument, this ignores circumstances in which the tax is later paid voluntarily (DRC-03) or collected by tax authorities through coercion, leaving the government with the tax but denying those who benefit from their due credit.

KSCAA claimed that the Section 41 provides a sufficiently broad enabling framework for such re-credit mechanisms. However, the operational rules do not reflect this flexibility

Additionally, they recommended enabling the GST portal to capture tax payments made outside the GSTR-3B structure and permit conditional ITC reclaim based on documentary evidence.

KSCAA also suggested adopting a credit reinstatement mechanism similar to the e-TDS model in income tax and stressed the need for automation and integration of enforcement data to ease compliance.

It further proposed that re-availment should be allowed up to the date of filing the annual return (GSTR-9) or within a reasonable time after confirmation of payment by the supplier or department.

KSCAA’s Suggestions Listed

In its recommendation following suggestions were provided by the accountants association :

“1. Expand Rule 37A

• Recognize tax payments via DRC-03 or other modes.
• Include tax recovered by authorities from suppliers.

2. GST Portal Enhancements

• Enable tracking of supplier tax payments across all modes.
• Allow conditional re-availment of ITC supported by documentary evidence

3. Automation & Verification

• Adopt a credit reinstatement mechanism akin to the e-TDS credit in income tax.
• Integrate enforcement and recovery data to streamline verification

4. Timelines for Re-availment

• Permit re-availment up to the relevant annual return (GSTR-9) or within a reasonable time window after payment/recovery confirmation

5. Documentation • Permit claims based on recovery notices or DRC-03 acknowledgments until portal upgrades are in place.”

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