The ITC saga

With a view to keep tab on those errant taxpayers who are claiming excess input tax credit (ITC), the Government has brought in regulations to ensure that ITC can be claimed only to the extent of the credit reflecting in their GSTR-2A.

This regulation may result in undue hardship to many tax payers, and more particularly to those small businesses that are not serious about the matching of their GSTR – 3B with their GSTR – 2A.

So let’s understand how we go about solving this issue and making our business accounting process smooth.

What is ITC?

Input tax credit (ITC) is the set-off of the GST paid by you on your input purchase of goods and/or services that you are eligible to claim against the GST collected on your output sale of goods and/or services. 

Who can avail of ITC?

Any entity which is registered under GST (other than those who are eligible to charge lower rate of GST under composition scheme) is eligible to claim the ITC on the purchase of goods and/or services which are used in the course and furtherance of business. 

What is GSTR-1?

Any entity which is registered under GST (other than those who are eligible to charge lower rate of GST under composition scheme) is required to file the return in GSTR-1 (either monthly or quarterly, depending upon your eligibility) wherein you shall declare the invoice wise details of all output sale of goods and/or services. The taxable value, the GST charged as well as the GSTIN of your customer needs to be declared in this return.

What is GSTR-3B?

Any entity which is registered under GST (other than those who are eligible to charge lower rate of GST under composition scheme) is required to file a monthly return in GSTR-3B wherein the total taxable value and the GST charged on the sale of goods and/or services as declared in the GSTR-1 is to be declared against which the credit of the GST paid by you on the purchase of goods and/or services is to be set-off and the balance GST payable (if any) is to be paid through the cash ledger.

In case the eligible ITC is higher than the gross output GST liability, the remaining ITC after set-off shall be carried forward to be set-off in the future months till it is exhausted.

Those registered tax payers who are not required to charge GST on their output sale of goods and/or services shall be eligible to claim the refund of the said ITC lying to the credit of their credit ledger. 

What is GSTR-2A?

The supplier of goods and/or services procured by you who has charged GST on his supplies to you is also required to file the above mentioned returns in GSTR-1 and GSTR-3B as explained above.

When your supplier duly files his periodic return in GSTR-1 and discharges his net tax liability by filing the monthly GSTR-3B, the GST collected by him from the supply of goods and/or services made to you will get auto-reflected in your credit ledger.

The invoice wise details of said supplies will be dynamically reflected auto-populated in your GSTR-2A as the credit available to you to be availed as set-off against your gross GST liability. 

What is the change in law?

The new regulations now specify that you shall be entitled to claim the ITC only against those invoices of those suppliers which are reflecting in your GSTR-2A, irrespective of the fact that you have physical invoices of these purchases.

The earlier rule of allowing credit on all purchase bills available with you had first been reduced to a margin of up to 20% (w.e.f. 09th October, 2019 till 31st December, 2019) of the total invoice value as per GSTR-2A, which was reduced to 10% (w.e.f. 01st January, 2020) and the GST council has limited it completely to the actual credit in GSTR-2A, w.e.f. 01st April 2020.

Why would your purchase GST not reflect in GSTR-2A?

If your supplier of goods and/or services defaults in filing the requisite returns on time, the input GST relating to those purchases will not be reflecting in your GSTR-2A and you will not be entitled to claim the credit for such ITC. 

What is provisional ITC in GSTR-3B?

Before 09th October 2019, all tax payers claimed ITC on a self-declaration basis in Table 4(a) of GSTR-3B. This means that you could declare the summary figure of eligible tax credits under IGST, CGST, and SGST and there was no compulsion to reconcile the ITC figure with the GSTR-2A, although it was always advised.

If the ITC amount in GSTR-2A was lower than the books of accounts, you could still make your full ITC claim in GSTR-3B, the un-reflected amount being treated as provisional credit.

After the implementation of this rule inserting a new rule 36(4) and thus restricting the provisional credit to 20% w.e.f. 09th October, 2019 and then up to 10% w.e.f. 01st January, 2020, the provisional ITC amount will be restricted only to the extent of 10% of the eligible ITC value already reflected in the GSTR-2A for that period.

This new rule could affect your working capital, as you will be required to make GST payments in cash, despite having paid your supplier for the tax invoice raised to you and having eligible ITC in your books.

How will the provisional credit be calculated?

If the total eligible ITC as per your books of accounts (say INR 100000) is higher than the eligible ITC as per GSTR-2A (say INR 80000) in a particular month, you would be allowed to take credit for only up to 10% of the difference [INR 82000] being [80000 + 2000 being 10% of (100000 – 80000)].

NB: Please note that we have used the words eligible ITC just to draw your attention to the fact that there could be ITC reflecting in your GSTR-2A due to reasons like wrong GSTIN mentioned by your supplier, purchases relating to ineligible credit like restaurant bills, club memberships, insurance premium, personal expenditure etc. You should ensure that you claim credit for only the eligible ITC 

When will the balance credit be available?

The provisional ITC which could not be claimed in a particular month due to the rule above can be carried forward and set-off claimed in the future month in which the supplier uploads the invoices in his GSTR-1.

In the above example, the ITC disallowed for not reflecting in GSTR-2A was INR 18000 (20000 – 2000) in the previous month and if your suppliers upload invoices worth INR 15000 (out of 20000) in the next month, the ITC credit of the previous month, which will be available in the next month would be INR 15500 being [15000 + 500 being 10% of (20000 – 15000)].

The provisional ITC allowed to be carried forward to later months will be INR 2500 [20000 – 2000 (availed in first month) – 15500 (availed in second month)] 

What precautions need to be taken?

You will be required to do a monthly reconciliation of the credit available in your GSTR-2A with the credit as reflecting in your books of accounts as per the purchase bills.

Any input GST credit not reflecting in your GSTR-2A should be immediately reported to your supplier and remedial action should be initiated to ensure that your supplier files his return. 

What changes are required in accounting practices?

We suggest that all tax payers should maintain different ledgers, one for the Provisional ITC and one for the Final ITC.

So in relation with ITC, the ledgers may be as follows:

  • Provisional ITC – SGST
  • Provisional ITC – CGST
  • Provisional ITC – IGST
  • Provisional ITC – GST Cess
  • Final ITC – SGST
  • Final ITC – CGST
  • Final ITC – IGST
  • Final ITC – GST Cess

The accounting entry to be passed in accounting records on the date of booking the invoice for purchase of goods and/or services shall be as follows:

Purchase of Goods / Services A/c.  Dr.

Provisional ITC – SGST A/c.   Dr.

Provisional ITC – SGST A/c. Dr.

Supplier A/c.   Cr.

After the monthly reconciliation of the Provisional ITC ledgers are done with the credit as reflecting in the GSTR-2A, the following accounting entry to be passed on the last date of the month.

Final ITC – SGST A/c. Dr.

Final ITC – SGST A/c. Dr.

Provisional ITC – SGST A/c. Cr.

Provisional ITC – SGST A/c. Cr.

The ITC entry as shown above for SGST and CGST was just for representation and hence similar entry will be required in case of purchases involving IGST / Cess etc.

While filing the monthly GSTR-3B, you should ensure that ITC credit is availed only for that value of the ITC which is reflecting in the Final ITC ledger.

Debits lying in the Provisional ITC ledgers need to be checked monthly since it may also relate to the purchases from those suppliers that are required to file only quarterly GSTR-1. Such un-reconciled debits should get credited at least by the end of the quarter to which it relates.

Un-reconciled debits in the Provisional ITC ledgers even after the end of the quarter clearly indicates default by your suppliers in filing their returns and immediate remedial action should be initiated.

This process will also help to keep track of the changes which are reflected dynamically in GSTR – 2A from time to time based on filing of returns by the supplier after the due date.

Did you know?

As per rule 69 of the Central Goods and Services Tax (CGST) Rules, 2017, following details must be matched to the claim of input tax credit.

  • GSTIN of the supplier
  • GSTIN of the recipient
  • Invoice or debit note number
  • Invoice or debit note date
  • Tax amount

The probable reasons for the differences between your records and the records of the supplier could be wrong GSTIN of the supplier, date related or entry errors while uploading invoice or debit note number, invoice or debit note date and errors in calculation of the tax amount.

What are the potential errors?

There can be errors at various levels. Let’s examine a few commonly found ones.

  • Errors by the suppliers: It often happens when the supplier enters your GSTIN wrongly. Furthermore the supplier might have not filed his GSTR-1.
  • Invoice related errors: There could be mismatch due to data entry error of invoice or debit note number by the supplier in their books of accounts.
  • Factor of time: It may happen that the supplier has issued invoice and it was not received by you. Or in some cases, when purchase has been made but the goods are still in transit or not yet shipped, then it will be required to reconcile the entries accordingly.

Was this article helpful?

Hopefully, this article would help the readers and users to understand GST as not just a tax reform but as accounting process reform as well.

Adoption of right accounting practices would certainly help in improving business processes for a hassle-free utilisation of the available benefits under the GST law.

Author Bio

Qualification: CA in Practice
Company: Sanjay Thampy and Associates
Location: Mumbai, Maharashtra, IN
Member Since: 22 Apr 2020 | Total Posts: 11
A practicing Chartered Accountant, I expertise in direct and indirect tax laws providing advisory services to various large and medium sized corporates. View Full Profile

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  1. vswami says:

    Why would your purchase GST not reflect in GSTR-2A?

    If your supplier of goods and/or services DEFAULTS IN FILING in filing the requisite returns ON TIME , the input GST relating to those purchases will not be reflecting in your GSTR-2A and YOU WILL NOT BE ENTITLED
    to claim the credit for such IT.


    Going by memory, the above view shared, with no reservation, prima facie, contradicts and runs counter to the view taken by the APA and APAA in Orders passed, on complaint, in reators’ cases ; check related Pr.POsts – Open to correction if factually not so !?


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February 2024