In part I of the article we have discussed, Key consideration to comply within the timelines for FY 2019-20.
In this part, i.e. Part II of this article we would discuss Procedures to be followed for the compliance of above-mentioned consideration and Practical challenges/caution to comply with the above-mentioned provisions.
I. Procedures to be followed for the compliance of above-mentioned consideration
This would ensure there is no misreporting made or missed out liability to be disclosed/paid or ITC to be availed.
a. Reconciliation of outward Supplies as per books and disclosed GST returns (Books vs GSTR 1 vs GSTR 3B) at PAN level and GSTIN level.
b. Reconciliation of e-way Bill report and Outward supplies as per books of accounts and returns
c. Reconciliation of closing Inventory recorded in books and Year-end physical inventory report to identify if any taxes supply has been made or ITC reversal
d. Reconciliation of Zero-rated supplies declared in GSTR 1 and GSTR 3B to ensure a smooth flow of refund.
e. Verification of supply of goods or services to own branches/units/employees without consideration treated as supply liable for GST in terms of schedule I to CGST Act 2017.
f. Finalization of cost allocation to branches and cross charge of expenses before finalization of annual accounts of FY 19-20 and disclosure in returns,
g. Tracking of goods sent on approval basis to ascertain the time of supply for payment of GST.
h. Verification of advance received for supply of services to ensure tax has been discharged and advance adjustment has been made.
i. Verification of transaction reported as B2CS which is B2B transaction.
j. Download of GSTR 1 invoice level and verification of correct disclosure as per books of accounts which will ensure credit availability to the recipient.
2. Input tax credit
a. Verification of conditions of Section 16(2) for availment of ITC such as possession of a document, receipt of goods and services, payment of tax to the government, filing of return by the vendor, and consideration has been within 180days.
b. Reconciliation of ITC as per books of accounts vs availed in GSTR 3B vs documents to ensure availment of eligible credit availed in the correct state.
c. Review expense ledgers and map the same with the input tax credit ledger as per GSTR-3B workings, to identify if any ineligible credits have not been availed.
d. Review of final computation of Input Tax Credits under Rule 42 and Rule 43 based on annual turnover so that the differential credits.
e. Verification of fixed asset register to ensure depreciation has not to be claimed on the ITC amount. In case depreciation claimed ITC to be reversed.
f. Perform year to date (YTD) GSTR-2A analysis every month to ensure all ITC is considered. Ideally to be performed quarterly, if not before the time limit of ITC claim for respective FY.
g. Ensure ITC has been availed as per Rule 36(4) for invoices dated from 09th October 2019 [GSTR-2A + 20% or 10%] and check GSTR-2A for the previous months for the subsequent updating of invoices by the vendor, if any, and availed such ITC in the present month.
h. Verification of ITC availed for February to August 2020 available in GSTR 2A. in case not available then ITC to be reversed.
i. Reconciliation of electronic cash ledgers and electronic credit ledgers with books of accounts.
j. Sending confirmation letter to vendors asking confirmation of disclosure of invoice details in returns.
k. Verification of vendor compliance to ensure invoice issued appropriately and disclosed appropriately in GSTR 2A.
l. Verification of availment of ITC only to the extent of receipt of goods as on 31.03.2020 and appropriately accounted in FY 19-20.
m. Identification of ineligible credits in the organization to ensure appropriate disclosure in Table 4(D)(2) in GSTR 3B.
n. Vendor analysis and categorization – amend payment terms for semi/non – compliant and unorganized sector – Tax payment after GSTR 2A reflection only.
3. Reverse charge Mechanism (RCM)
a. Identification of expenses liable to RCM and transactions reported in GSTR 3B.
b. Verification of Form 15CA and Form 15CB (required by a person making the remittance (a payment) to a Non-Resident or a Foreign Company), identification of import of services liable under RCM and an additional amount of payment of tax under RCM.
c. Verification of following main RCM transaction specifically made liable in FY 19-20 such that interest liability would not be added to the cost
i. Services provided by way of renting of a motor vehicle provided to a body corporate.
ii. Services of lending of securities under Securities Lending Scheme, 1997 (“Scheme”) of Securities and Exchange Board of India (“SEBI”).
iii. Supply of services by an author by way of transfer or permitting the use or enjoyment of a copyright relating to original literary works to a publisher.
iv. Supply of services by a music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright
relating to original dramatic, musical or artistic works to a
the music company, producer, or the like.
d. Reconciliation of tax paid under RCM and availment of credit under RCM except for difference of ineligible credit as per section 16, 17 and 18.
II. Practical challenges/caution to comply with the above-mentioned provisions
a. Restriction of amendment in GSTR 1: It has been restricted to one time by the common portal however such restriction has not been provided in the law. In such a case, the supplier has to be very cautious for amending the same as the recipient would not be able to claim ITC in case not available in GSTR 2A of the recipient.
b. Correlation of credit note with single invoice: Section 34(1) has been amended vide Finance Act 2019 stating one to one correlation of credit note and invoice is not required. However, the GST portal restricts disclosing credit notes issued for more than a single invoice in GSTR 1. Presently credit note can be linked to a single invoice if invoice value is more than credit note and for other cases, suggest to issue more than one credit note.
c. Adjustment of Credit note: The government portal does not allow to disclose negative values in GSTR 3B in case there were no sufficient outward supplies till September of the next financial year to adjust the taxes on credit notes. The only option would be to claim a refund under “others” head of such amount as provided in Circular 26/2017 – CGST. However, claiming a refund would not be an easy task.
d. ITC on Debit Note: Clarity is awaited for entitlement of ITC in respect of debit note issued after notification has been issued (delink of debit note with the invoices for availment of ITC) of FY 2017-18 or FY 2018-19 also. Presently there has been no restriction provided in the Finance Act 2020 for such availment however clarity is expected in the notification to be issued.
e. Compliance of Rule 36(4):
i. Extension of Rule 36(4) for the period February to August 2020 has led to non-availment of credit of October 2019 to January 2020 in case of ITC not claimed due, not available in GSTR 2A but available in February to August 2020. Due practically there has been no restriction on availment of the same.
ii. ITC claimed for the period February to August 2020 based on the invoice however subsequently credit has not been reflected in GSTR 2A would require reversal t comply with Rule 36(4). There would be many vendors who would not have filed returns due to COVID 19 pandemic. Time would lapse for the availment of credit for February and March 2020. Follow up with the vendor for compliance under GST or withholding of tax amount for invoices pertaining to the vendor not filed or inappropriately filed would be a measure to overcome.
iii. For reversal of ITC in case of the invoice not available in GSTR 2A to comply with Rule 36(4) whether interest would be applicable? Clarity has not been provided for the same. However, understanding the practicality of the same, interest would be applicable for the reversal of ITC.
f. Amnesty Scheme: Amnesty scheme has given waiver or reduction of ITC however such reduction has not been provided for interest payable hence it would be advisable to file the returns as soon as possible to comply with the reduction in payment of interest.
Considering the huge impact of COVID 19 pandemic in the business, the arrangement of working capital has become a greater challenge to run the business. However not complying with the tax laws would lead to the additional burden of interest and the late fee being added to the cost of the organization. In addition to that availment of credit has been majorly dependent on supplier compliance under GST which has led to dependency with the other parties’ compliance. However, in case, the tax has not been paid before 20th October 2020 (unless extended) shall be paid through Form GST DRC 03.
Compliance of various procedures stated above is time-consuming, hence starting earlier would ensure better compliance and also would lead to appropriate disclosures in annual return and reconciliation statement.
Special thanks to CA Akshay Hiregange for inputs. The author could be reached at firstname.lastname@example.org for any queries /feedback.