ITC restricted to 10% of 2A, No resolution for qtrly filers, impact with example

Impact of ITC restricted to 10% of 2A

GST council meeting took a decision for ITC restricted to 10% of 2A. Rule 36(4) of CGST Rules already reduced the ITC limit to 2015 of eligible. Now it is further reduced to 10%.The impact of this provision will be worse on various businesses. Depending on the nature of the business it may get severe. Let me make it simple via an example.

Period:1

Purchase during the month: Rs. 100,000 with Tax of Rs. 18000

Sales: Rs. 200,000 with 36000Rs Tax.

Now the supplier is a quarterly filer. At the time of filing of my return for P1:

Input Tax: Rs. 18000

Output Tax: Rs. 36000

Earlier I was liable to pay only Rs. 18000 as GST is a value-added tax. But now I will be liable to pay, Rs. 36,000.

I need to pay this via cash ledger by depositing it. 

Period II:

Now let us say next month again my purchase is Rs. 2,00,000 with tax of Rs. 36000

Sales: Rs. 300,000 with the tax of Rs.54,000

My liability at the time of filing of return: Rs. 54000

Input Tax: Rs. 36000

Net cash outflow in two months is Rs. 90,000.

Period III

In the third month say my purchase is Rs. Rs. 4,00,000 with a tax of Rs. 72000.

Sale: Rs. 3,00,000 with tax of Rs. 54000.

I can pay this Rs. 54000 with ITC of 54000 but a balance of Rs. 72000 will still be there in the ledger. I can’t even take a refund of this.

How the business will try to tackle this situation: 

In light of fact that we are in a recession, this will hurt businesses. They will have one of the two options. Either they will stop buying from small businesses. Or they will postpone buying to 3rd month or they will keep the payment on hold. In any case, businesses will suffer and the economy too.