New Section 38 of the CGST Act: Implementation of Revised Input Tax Credit Provisions
- Rashmita Choudhary
- Nov 12
- 9 min read
The CGST Act's Section 38 deals with providing information on inward supplies, allowing the recipient to add, remove, or alter invoices that the provider provided in his outward supply report (i.e., GSTR-1). However, since this GST model was never put into practice, Section 38 has been modified under Section 104 of the Finance Act, 2022, to offer eligible and ineligible ITC in accordance with the current GST model. Because of the prevalence of input tax credit (ITC) fraud through fictitious organisations and invoices, the amended Section 38 was put forth in an attempt to further restrict ITC claims. This section's rules will also assist in preventing any legal disputes.
Table of Contents
Section 38 and Input Tax Credit Claims Before Finance Bill, 2022
"Furnishing details of inward supplies" is the title of the previous Section 38 of the CGST Act. It regulated the supplier's provision of information on outward supplies (i.e., sales), the buyer's acceptance of such inward supplies (i.e., purchases), and the buyer's claim for ITC on the same. Although the procedure was never followed, the section was built on a two-way communication methodology. In accordance with Section 37(1), the seller must provide information about outgoing supply, such as the GSTR-1. After that, the buyer must accept, alter, or remove these supplies in their inbound supplies return (also known as the GSTR-2), which must then be returned to the supplier within the allotted time. Lastly, the clause mandated that the recipient taxpayer balance the outside supply recorded by their provider with the inward supplies reported by themselves. The provider should be informed if any mistakes or omissions are found. Additionally, the government must receive all taxes and interest related to any late payments before the deadline.
An Overview of the Revised Section 38 of the CGST Act
The Finance Bill 2022's amended Section 38 is called "Communication of details of inward supplies and input tax credit." It eliminates the two-way communication process between the buyer and seller and limits input tax credit claims in multiple ways (although it was never followed). Two subsections convey the new section's purpose:
According to the first subsection, a taxpayer's suppliers must provide information about their outbound supply in an automatically created statement called the GSTR-2B. (Note that this procedure is already being followed; the new law will now support the current CGST Rules.)
The GSTR-2B's contents are outlined in the second subsection. To put it simply, it informs taxpayers about the situations in which they may or may not be eligible for input tax credit (ITC).
Among the limitations in this provision pertaining to ITC ineligibility are situations in which the supplier has recently registered under the GST law, failed to pay their taxes, or obtained additional ITC illegally, to mention a few.
An Overview of the Clauses of Revised Section 38 of the CGST Act
The amended Section 38 subsection (2) is a little difficult for taxpayers to comprehend. Let's go over each clause in this section.
1. The information on inward supplies and available ITC for the recipient (buyer) to claim in the GSTR-2B statement is specified in clause (a) of subsection (2). That is, eligible ITC.
2. Clause (b) is more intricate. It includes information about inbound supplies provided by the provider in the GSTR-2B, for which ITC may not be available. Put differently, ITC is ineligible. There are six components to this clause:
After a provider registers under the GST law, they are not eligible to get ITC on supplies they provide during the allotted time.
Supplies provided by a supplier who has not paid their taxes are not eligible for ITC if the default has persisted for a predetermined amount of time.
If the supplier's tax liability exceeds the amount of tax actually paid during the specified period and by the specified limit, ITC cannot be claimed on such shipments.
Supplies provided by a supplier may not be eligible for ITC if the provider has claimed more ITC than permitted under clause (a). This section also states that the prescribed limit determines the excess.
Supplies provided by a supplier who has not paid their tax liability under Section 49(12) are not eligible for ITC, subject to the specified limitations and conditions.
Supplies provided by a supplier who is a member of another class of people may not be eligible for ITC.
Section 38 Revision and ITC Claims: An Illustration
It is crucial to comprehend the current section 38 in order to understand the implications of the new one. The following table provides an example of the ITC under the previous Section 38 of the CGST Act, 2017:
Particulars | Amount |
ITC as per books | Rs. 12,00,000 |
Total ITC as per Form GSTR-2B | Rs. 11,00,000 |
Eligible ITC as per Form GSTR-2B | Rs. 10,00,000 |
Amount of ITC recipient can avail | Rs. 10,00,000 |
The ITC claims process under the previous Section 38 was quite simple.Now, let us consider an example of the ITC under the revised Section 38 of the CGST Act:
Particulars | Amount |
ITC as per books | Rs. 12,00,000 |
Total ITC as per Form GSTR-2B | Rs. 11,00,000 |
Eligible ITC as per Form GSTR-2B | Rs. 10,00,000 |
ITC relating to the supplier newly registered under GST | Rs. 50,000 |
ITC relating to the supplier defaulted in tax payment | Rs. 80,000 |
ITC relating to the supplier whose output tax payable as per GSTR 1 return exceeds output tax paid as per GSTR-3 | NIL |
ITC relating to the supplier who has availed more ITC in Form GSTR-3B as compared to Form GSTR-2B | Rs. 50,000 |
ITC relating to the supplier who has not complied with the conditions of provisions of section 49(12) | Rs. 20,000 |
Balance Amount of ITC recipient can avail (Rs. 10,00,000 – Rs. 50,000 – Rs. 80,000 – Rs. 50,000 – Rs. 20,000) | Rs. 8,00,00 |
It is evident from the aforementioned example that the beneficiary was previously qualified to receive Rs. 10,00,000 in ITC. However, the beneficiary can only receive Rs. 8,00,000 in ITC under the new Section 38. Naturally, the new section 38 will make it more difficult to obtain an input tax credit, which will undoubtedly affect a company's working capital.
Impact of Revised Section 38 on ITC Claims
The majority of taxpayers could be perplexed as to why their suppliers are either newly registered or have defaulted, making it impossible for them to receive input tax credits. The smooth flow of input tax credits was promised to taxpayers when GST was implemented. Since the implementation of GST, input tax credit claims have been a source of fraud and tax evasion. Fraudulent taxpayers who obtain input tax credits based on fictitious invoices cause the government to lose hundreds or even thousands of crores every year. These invoices are produced by companies that are created specifically for this reason before closing. In order to put an end to all ITC-related fraud, the government recommended the amended Section 38, which primarily altered three aspects for taxpayers.
To guarantee that their ITC applications are always 100% accurate and eligible, their reconciliation procedures became more frequent, dynamic, and ideally automated.
Taxpayers must make sure they only work with suppliers who are compliant. Once more, the market's automated GST solutions allow taxpayers to verify the compliance of their suppliers prior to onboarding them. Higher ITC claims are the result of a compliant supplier.
If a supplier is non-compliant (i.e., fails to pay taxes or claims excess ITC), or if a taxpayer fails to match all of their input tax credits. The ITC that is legally owed to the recipient taxpayer (buyer) cannot be claimed. Their working capital will be impacted and their GST cash liabilities will only rise as a result.
Latest Updates
As per the Union Budget 2025, there have been some additional updates in Section 38 of the CGST Act. Since Section 38(1) is being altered to remove the phrase "autogenerated," GSTR-2B may no longer be totally system-generated, necessitating manual confirmation of invoices. CGST Section 38(2)'s new clause (c) increases compliance requirements by enabling the government to stipulate more ITC statement elements.
Conclusion
The main goal of revising Section 38 is to stop fraudulent activities such as creating fictitious invoices and falsely claiming input tax credits when completing a GST return. The new provisions of rule 38 of the CGST SGST regulations describe situations in which the buyer or recipient is not eligible for an input tax credit. Although real buyers may have difficulties as a result of the new Section 38, it will significantly reduce ITC fraud and promote a smooth operation of the input tax credit.
FAQs
Q1. What is Section 38 of the CGST Act?
The CGST Act's Section 38 addresses communicating and providing information on inward supplies and input tax credit in the form GSTR-2B.
Q2. What is the revision in Section 38 of the CGST Act?
The main modification to Section 38 is the addition of a clause that limits ITC claims when there are discrepancies between the information provided by the supplier and the recipient on the goods and services. It has increased the need for the recipient to only do business with suppliers who comply.
Q3. What are the key changes in the new Section 38 regarding ITC claims?
The key changes in the new Section 38 include:
The introduction of a matching mechanism between the taxpayer's claimed ITC and the information supplied by the supplier is one of the main improvements in the new Section 38.
If the supplier has not recorded the transaction or if the information is inconsistent, the availability of ITC may be restricted.
To lessen the possibility of fraudulent claims, the taxpayer must make sure that they only make credit claims based on legitimate and reconciled invoices.
Q4. What are the benefits of the revised Section 38 for GST administration?
By discouraging dishonest behaviours, including creating fictitious invoices and incorrectly claiming input tax credits, the updated Rule 38 of the CGST SGST regulations seeks to improve GST compliance. By guaranteeing that credits are only claimed in appropriate situations, it also seeks to simplify tax management.
Q5. What is Rule 38 of ITC reversal?
The CGST Rules' Rule 38 addresses the reversal of ITC in specific circumstances, mainly when the items or services are transferred out of the business, lost, stolen, or destroyed, or used for non-commercial activities. In order to avoid credit system abuse, it guarantees that the credit claimed on such items or services is reversed.
Q6. Are there any exceptions or special cases where Section 38 provisions do not apply?
All GST-registered taxpayers are subject to Rule 38 of the CGST SGST regulations. However, depending on announcements from the Central Board of Indirect Taxes and Customs (CBIC) or the GST Council, certain relaxations or exclusions might be applicable.
Q7. How does the new Section 38 enable the prevention of fraudulent ITC claims?
The new Section 38 can curb fraudulent ITC claims by:
Introducing a method that guarantees ITC is only claimed after the supplier has entered the required information in the GST system, the new Section 38 helps avoid fraudulent ITC claims.
Restricting the ability to claim ITC due to discrepancies in the supplier's submitted data.
Implementing a more transparent and automated process to lessen the likelihood of false or fraudulent claims.
Promoting prompt and precise reconciliation of supplier and purchase data using GSTR-2B and similar systems.
Q8. What are the conditions under which ITC can be restricted under Section 38?
Section 38 may restrict ITC if the supplier:
Is a recently registered GST business.
Has submitted their GSTR-1 but not the GSTR-3B.
The GSTR-1 has a higher liability than the GSTR-3B.
GSTR-3B has a higher ITC than GSTR-2B.
Has failed to pay taxes after receiving demand notices (and the default persists)
Has not complied with Rule 86B's requirements (i.e., paid their full liability in ITC rather than a portion of it in cash as required).
Q9. How does GSTR-2B impact the ITC claims under Section 38?
Based on the information provided by the supplier in GSTR-1 and GSTR-3B, GSTR-2B is an automatically generated statement that compiles the ITC information accessible to a taxpayer. GSTR-2B assists the taxpayer under Section 38 by giving precise information regarding the ITC that can be claimed, including any differences between the supplier's and the recipient's reports. It serves as an essential instrument for confirming ITC claim eligibility.
Q10. What steps can buyers take to ensure GST compliance by their suppliers?
By routinely checking their GSTIN status, making sure suppliers pay taxes on time, and confirming compliance with invoicing and reporting procedures in accordance with GST regulations, buyers may keep an eye on their suppliers' GST compliance.
Q11. Can businesses rectify errors in the details of outward supplies after filing under Rule 38?
Indeed, companies are able to correct inaccurate information about outbound supply in later GST forms. To avoid penalties, however, adjustments must be performed in accordance with the guidelines and within the allotted time frames.
Q12. How can taxpayers make their ITC claim process more efficient?
Taxpayers would have to make sure that an effective ITC claim procedure and a strong system of vendor verification were in place. With automation, this may be accomplished in only three steps:
Set up the ERP to record all vendor and invoice details.
Prior to onboarding, verify vendor compliance.
Before paying the vendors, perform a dynamic matching with the GSTR-2B. The buyer may choose to withhold payments if suppliers do not comply.
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