5 BASIC CONDITIONS FOR AVAILING INPUT TAX CREDIT

Following conditions should be satisfied to avail input tax credit under GST

1. Goods or services received must be for furtherance of business
2. Tax Invoice, Debit Note, Bill of Entry should be available
3. Goods or services must be received
4. Tax charged on the invoice should be paid by vendor
5. Vendor must have filed its returns

Compliance of conditions number 1 to 3 is under the control of the person claiming the ITC but conditions number 4 and 5 are dependent on external factors where the taxpayer needs to track the compliance status of his vendors for finalisation of his own claim of ITC.

WHAT HAPPENS WHEN ABOVE CONDITIONS ARE NOT SATISFIED?

Now the burning question is what will happen when the taxpayer fails to satisfy any of the above conditions?

1. Your claim of ITC becomes incorrect and invalid.
2. Reversal of wrongly claimed ITC and levy of interest @ 24%
3. Demand of Tax and interest by government on reversal.
4. Levy of penalty equal to amount of ITC wrongly claimed.
5. Prosecution and imprisonment.

WHY THIS RECONCILIATION IS IMPORTANT?

The ITC reconciliation is an important activity to do due to following reasons.

• Ensuring correct claim of ITC by the company
• Avoiding risk of reversal of ITC, levy of interest and penalty by government.
• Protecting the bottom line of the company.
• Identifying the misuse of GSTIN of the company.

WHY ITC RECONCILIATION IS A TIMELY EXERCISE TO DO?

ITC reconciliation is a timely exercise due to following reasons.

1. Matching of ITC is mandatory condition under GST.
2. Government can scrutinize the GST returns upto 6 years.
3. If reconciliation not done, company is carrying major risk for 6 years.
4. With interest @24% the ivnterest cost may be high than basic tax.
5. In case of delay, recovery from defaulting vendor is difficult.
6. Detection of misuse of your GSTIN is possible by regular reconciliation.

HOW ENTRIES IN GSTR-2A CAN BE A REASON FOR TAX DEMANDS?

GSTR-2A is not only the tax credit report but also a tax demand report.

1. RCM invoices of GST registered vendors show up in GSTR-2A.
2. If RCM invoices not reconciled with own books, government can raise demand of tax under RCM.
3. Company will not be able to claim ITC of demand deposited under audit.
4. Purchase invoices can also show up in GSTR-2A which may not have been entered in the books. This can also result in demand of tax.

8 STEP PROCESS OF RECONCILIATION AND TRACKING VENDOR COMPLIANCE

Process for reconciling own ITC with GSTR-2A.

1. Monthly matching exercise with 2A & ITC Register.
2. Track invoice status showing as “Submitted” or “Not Submitted”.
3. Track the status of filing of GSTR-3B by vendor.
4. Find out any entries in ITC register unmatched with 2A and reasons thereof.
5. Rectify the mismatching entries in ITC register with 2A due to own error.
6. Identify and follow up the mismatching and unmatching entries in 2A due to vendor error.
7. Find out and avail unclaimed ITC appearing in 2A.
8. Taking steps like issue of debit notes or withholding of payment of vendors till resolution of ITC issuevs.

TOP REASONS OF MISMATCHED, UNMATCHED AND UNCLAIMED ITC IN 2A

• Wrong data input by own team
• Wrong data input by vendor team
• Debit notes and credit note issues
• Tax invoice issued but GST returns not filed by vendor
• Invoice issued in a month but ITC claimed in another month.
• Amendment of tax invoice by vendor
• Issue of  debit notes or credit notes by vendors.
• Place of supply mismatches

CHALLENGES IN RECONCILIATION PROCESS

• System to track ITC and 2A data simultaneously is not available
• Time consuming process
• Lack of collaboration between team members
• Usage of complex excel formulas and maintaining multiple excel files across the organization.
• Frequent changes in accounting and finance team.
• Handling of updates and amendments in 2A.
• Identification and resolution with defaulting vendors.