Arjuna (Fictional Character): Krishna, Government has issued new notification on 09/10/2019, restricting ITC to maximum 20% excess of ITC as appearing in GSTR-2A. So, what is it?

Krishna(Fictional Character): Arjuna, new restrictions on claim of ITC are brought in. It’s like the ground for GST ITC 20-20 match is ready, recipient is the batsman and supplier is the bowler and each monthly return would be a 20-20 match. Surely recipient is going to be loser in this match. Government has issued a notification which states that maximum ITC which a taxpayer can claim is 20% excess of ITC as appearing in GSTR-2A i.e. 120% of ITC as appearing in GSTR-2A or ITC as per books, whichever is lower. It’s a difficult rule, which is more complex than “Duck-worth Lewis” rule of cricket ICC 20-20. GSTN being third umpire would play crucial role in this game as it’s decision would be final.

Arjuna: Krishna, What is GSTR-2A?

Krishna: Arjuna, GSTR-2A is a GSTN system-generated report of inward supplies and ITC of taxpayer. When a supplier i.e. bowler files his GSTR-1 the information is reflected in GSTR-2A of the recipient i.e. batsman. Let us understand this with an illustration:

If “A” supplies goods of Rs. 2,50,000/- to “B”. Here “A” being supplier has to report his outward supplies of Rs. 2,50,000/-  in GSTR-1. Once supplier “A” files his GSTR-1 then such transaction of Rs. 2,50,000/- will be reflected in GSTR-2A of recipient “B”.  Thus, ITC is reflected in GSTR-2A of the recipient. Earlier, ITC though not reflected in GSTR-2A recipient was claiming ITC, now restrictions have been brought on such mismatch of ITC.

Arjuna: Krishna, what are the roles and responsibilities of supplier?

Krishna: Arjuna, new notification has lead onus on supplier being bowler to upload GSTR-1 within due date i.e. bowl on wicket direct, so that the recipient can claim such ITC in subsequent GSTR-3B. If supplier bowls wide ball i.e. do not file GSTR-1 in time, the recipient will face difficulties in claiming ITC being the transaction is not reflected in his GSTR-2A.

Arjuna: Krishna, what are the roles and responsibilities of recipient under new scenario?

Krishna: Arjuna, recipient being batsman should be ready for every shot. The roles and responsibilities are as follows:

  • The recipient has to reconcile purchase as appearing in Books of accounts with GSTR-2A.
  • Recipient has to take regular follow up with supplier so that supplier files his GSTR-1 within due date and upload every invoice.
  • It would greatly impact working capital and cash-flow, if mismatches arises in GSTR-2A and ITC claimed.

Let us understand this with an example:

If “A” is taxpayer and has ITC of Rs. 2,50,000/- in books. But the ITC as appearing in GSTR-2A is 2,00,000.

Now in this case, ITC appearing in Books is Rs. 2,50,000/- but ITC appearing in GSTR-2A is Rs. 2,00,000/-. So as per new notification maximum permissible ITC to “A” is Rs. 2,00,000+20% i.e. Rs. 2,40,000. So, “A” cannot claim balance mismatched ITC of Rs.10,000/- i.e. (2,50,000-2,40,000) and such claim would be disallowed and needs to be claimed when matched in future.

Arjuna: Krishna, What are the difficulties in this ITC 20% rule?

Krishna: Arjuna, This rule is more complex than “Duck-worth Lewis” rule of cricket. Number of issues are going to arise, like how to calculate it, whether invoice-wise or supplier-wise? How updated and reliable is GSTR-2A report of GSTN? How to keep track of mismatch in each return? What about interest liability on mismatch? How it will be implemented, etc.? Lots of confusion will arise due to monthly and quarterly GSTR filing periods. God knows how a taxpayer will save himself from such draconian rules.

Arjuna: Krishna, what lesson should one learn from this?

Krishna: Arjuna, the changes notified are going to be tough for taxpayers. It would involve huge burden of cash-flow. ITC reconciliation for recipient i.e. matching books and GSTR-2A is cumbersome process. GST was supposed to be “Simple Tax” but this new notification has further deteriorated the situation for taxpayers. Thus, taxpayer will find it difficult to play in this GST ITC 20-20 tournament.

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  1. Raviraj Shetty says:

    Dear Krishna,

    Nice article laced with metaphors. But, being Krishna, you should eliminate our doubts, confusions and Nervousness. These all things are Arjuna to feel. Complaints and questions have to be from Arjuna.

    Kindly suggest assuming GOI as Arjun, how it could protect itself from the mischievous traders who are non compliant, fraud and unscrupulous people, claiming bogus credits.

    I regularly look at your columns, but would appreciate if you could throw some solutions to the problems being discussed.

    Thanks for clarificatory part of the article.

  2. Amaan says:

    Dear Krishna,
    We understand the changes notified are going to be tough for taxpayers. However, ITC reconciliation is not that cumbersome if we are using a software.
    We have recently engaged with Firmway. Their GSTR 2A Reco software has provided excellent results. You also save on your cash outflow. You can reach them at 9769599848.

  3. Sanjay Kumar says:

    Thanking you for giving good example making it conducive to readers. it is an classical example and gives us to learn from your esteemed site.

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December 2020