Recently, there have been multiple amendments and notifications under GST. This leads to difficulty in confirming whether an entity is in compliance with the GST law or not. Some of the recent changes are:
-E-invoicing being introduced in a phased manner from October 2020.
-Finance Act 2021, having major modifications but not yet notified
-Pandemic lockdown related notifications
-Rule 36(4) – 5% ad-hoc credit reduction and validity
Considering industry hardship and ambiguity in GST claim, this article has been prepared for ease in ITC claim procedure from April 2021 onwards. This document could be used as in limited GST-ITC SOP (standard operating procedure)/imbibed into the existing ITC claim procedure of an entity.
Step 1 – Identify Credits
1. Identify eligible credits as accounted in the books of accounts.
2. Eligibility requires satisfaction of conditions u/s 16, which can be summarised as follows:
a. Availability of invoice/e-invoice (incl. debit note)
b. Such invoice/debit note is disclosed in GSTR 1 of the vendor (see*note below)
c. Actual or constructive receipt of goods/services
d. Tax has been paid to the government (see #note below)
e. Recipient has filed GSTR 3B
*note – Provision has been introduced in Finance Act 2021 but is yet to be notified to be considered effective under GST law.
#note – Verification of whether vendor has paid tax to the government, although, this is practically impossible. Therefore, considering a well-established legal maxim Lex non cogit ad impossibilia (law does not compel a man to do that which he cannot possibly perform)” coupled with the fact that the Constitution of India provides the right to do business and anything which restricts such function can be questioned, we can conclude that a recipient cannot be enforced to verify whether tax has been paid to government to avail credit under GST without a functionality being provided by the department (For example implementation of GSTR 2 & 3 which has been deferred indefinitely). Although, a declaration from the vendor could be obtained that such tax was paid to the government.
Some favourable rulings w.r.t ITC:
3. Based on the ineligibility conditions u/s 17, credits may need to be bifurcated as ineligible as transferred to expense accounts. Ineligible ITC u/s 17(5) – may refer this article for in depth analysis and possible benefits being missed out – https://taxguru.in/goods-and-service-tax/gst-itc-ineligible-changes-w-e-f-1st-february-2019.html
Step 2 – Reconcile Credits
Decision to use GSTR 2B instead of GSTR 2A as the data in the GSTR 2B remains static unlike in GSTR 2A which is dynamic and changes as and when vendors file (even on delayed basis). This will reduce reconciliation ambiguity and provide clarity.
Update – Due to various returns extensions due to the pandemic, GSTR-2B for April 2021 will be generated on 29th May 2021.
How to perform reconciliation of ITC?
a) Download GSTR 2B after GSTR 1 due date (T+2 days) for reconciliation
b) Other than matching entries, reasons for mismatches to be bifurcated and suggestions:
|Type 1 – Credit is GSTR 2B but invoices not yet accounted
Type 2 – Credits in books of accounts in current month but reflected in GSTR 2B in previous months
|Credit not to be claimed, confirm satisfaction of 4 conditions as per Section 16. Park it as ‘Pending – claim upon accounting’|
|Type 1 – Credits in books of accounts of past period but reflected in GSTR 2B of current month
Type 2 – Credits in books of accounts till date but not reflected in GSTR 2B yet
|Credit not to be claimed, claim after GSTR 2B reflection only. Park it as ‘Pending – vendor follow up’|
|Mismatch in values between books and GSTR 2B||Suggest claiming credit only after rectification is complete. Park it as ‘Pending – vendor correction’|
c) After above steps, eligible ITC to be claimed in GSTR 3B.
d) Any ‘pending’ credits need to be re-looked at every month before filing GSTR 3B.
Update – Due to pandemic situation, GSTR-2B Vs GSTR 3B reconciliation as per Rule 36(4) for April 2021 can be performed while filing May 2021 GST returns. From 1st January 2021, the ad-hoc credit which could be claimed was reduced from 10% to 5%. This may go from 5% to NIL, once Section 16(2) (aa) is notified wherein the Act would override the Rule.
Communication with taxpayers – GST portal has introduced a functionality to communicate with recipient or suppliers. (Under ‘Services > ‘User Services’). The inherent limitation that communication may not reach the intended persons remains (Operations team/Accounts Payable team of supplier). Some features of the utility are as follows:
♦ Read and reply options available
♦ Email & SMS notification sent to registered details
♦ Missing invoices can be uploaded by recipient to the supplier
♦ Limit – 100 notifications to a GSTIN
♦ Payment status can also be provided to suppliers
Step 3 – YTD Tracking
It is suggested to maintain 3 ledgers on year to date (YTD) basis
♦ Eligible ITC as per books of accounts
♦ Eligible ITC as per GSTR 2B
♦ ITC claimed in GSTR 3B
Advantages of maintaining YTD information:
√ Help ensure all pending ITC, in GSTR 2B/Books of accounts would be considered.
√ No credit loss – due to time lapse or missed out
√ Easy identification for follow up with vendors
√ Helps make vendor payment decisions
Due to various changes in the law, restrictions in credit claim and follow up with vendors. Some useful tips have been provided:
a) Vendor on-boarding – ensure KYC is completed. Could include – name, business description, classification of goods/services, communication address, contact details including escalation matrix, GST registration certificate.
b) Vendor categorisation – based on size of the vendor, brand value, consistency in filing GST returns, market view on said vendor.
c) Documentation – Purchase order, verification of vendor invoice to PO, agreement with terms and conditions.
Based on the above information, vendors could be categorised wherein for non-compliant/ unorganised vendors payment terms could be amended. Suggest making payment of tax element of the invoice after GSTR 1 details are uploaded by vendor and the same reflects in GSTR 2B.
Step 4 – ITC reversals
ITC reversals may apply when payments are not made to vendors within prescribed limits or when credits are utilised against exempt supply. Computation would be as per Rule 37 (180 days non payment), 42 & 43. Some useful information to be considered during ITC reversal:
Step 5 – RCM liability
Expenses liable under RCM, would be eligible for credit upon payment subject to Section 17(5) restrictions. Some important information on RCM:
Where RCM liability was inadvertently discharged by the supplier himself, the following Service Tax case law could be used – Umasons Auto Compo Pvt Ltd Vs Commissioner of Central Excise & Customs, Aurangabad [2014 – TIOL – 126 – CESTAT – MUM].
Although, a declaration from the vendor could be obtained that such tax was paid to the government.
Step 6 – Vendor E-invoice
E-invoicing introduced from 1st October 2020 has been made mandatory for entities having more than Rs. 50 crore turnover from 1st April 2021.
Rule 48(5) indicates that any person who is required to follow e-invoicing provisions, is required to provide tax invoice with Invoice Reference Number (IRN) and QR code.
Some suggestions have been provided against the difficulty a customer/recipient may face:
a) How is the recipient allowed to identify if vendor is required to follow e-invoice provisions?
Ans: E-invoice govt. website displays the list of GSTINs where e-invoicing is enabled. It also provides updated list of GSTINs generating e-invoices presently.
Alternatively, if the process is cumbersome, a declaration could be obtained from vendors on non-applicability of e-invoicing provisions.
b) Can the recipient be penalised if supplier is non-compliant with GST law?
Ans: Department could dispute credit claimed on tax invoice without IRN & QR code. Although, this could be disputed if serial (a) is documented.
Step 7 – Other Important Learnings
For most common eligible/ineligible credits and tips on accounting expenses and credit, refer below:
♦ Common eligible credits:
i. Raw materials (incl. normal loss)
ii. RCM on import of service (verify form 15CA/CB for liability)
iii. RCM credit in relation to renting of motor vehicles (13-seater or more)
iv. Plant & Machinery linked construction credits
v. Insurance credits (incl. employee gratuity)
vi. Admin expenses – bank charges, telephone, internet, etc.
vii. Employee expenses – Uniform, shoes, etc.
viii. Business travel expenses
ix. Import of goods, especially those without payment (DDP basis).
♦ Common ineligible credits:
i. Credits directly in relation to outward exempt supply unless goods or service exported
ii. Raw materials/Inputs – abnormal loss only
iii. Construction of immovable property related credit
iv. Health and life insurance
v. Motor vehicle credits (incl. insurance and repairs & maintenance)
vi. Food & beverages (restaurant or catering)
vii. Invoices where GSTIN has not been mentioned by vendor
♦ Tips on accounting in books of accounts:
i. Create separate ineligible credit ledgers to help identify and maintain track for internal reviews and disclosures in GST returns
ii. Enforce cut-off dates for accounting, i.e. do not allow back dated entries to avoid reconciliation issues and missed out credits.
iii. Introduce a maker-checker policy, wherein checker is well versed with GST provisions and can rectify classification of expenses.
♦ Disputable areas w.r.t ITC:
i. Time limit as per Section 16(4) does not apply to Customs related documents, as it mentions only ‘tax invoice’ and ‘debit note’. Therefore, credit in relation to Bill of Entry could be claimed irrespective of tax period.
ii. TR-6 Challan (generally generated during EOU debonding/exit procedure) – not listed as a Customs document under GST. Although, in erstwhile law was mentioned in CENVAT Credit Rules. This anomaly cannot take away the substantial benefit of credit and therefore ITC under GST based on TR-6 challan is eligible in the author’s view.
iii. Self-invoice provisions against RCM expenses from unregistered persons is not linked to time of supply provisions. This interpretation could lead us to raise a self-invoice at any point in time and claim the credit based on such self-invoice. (assuming RCM liability is accounted based on self-invoice). Note, interest for delayed payment of tax would apply.
iv. A general observation is that cross charge liability has not been discharged. Again here, as liability and invoice is accounted in a delayed manner, and invoice cannot and should not be raised in a back dated manner, the recipient would be eligible for credit based on present dated invoice raised.
Conclusion: A simple flowchart can summarise our above discussions, which can be followed used as an ad-hoc checklist for credit claim under GST on a periodic basis:
Contents of this article depict the author’s view. The reader is expected to exercise due care and professional support upon implementation. Article written by CA Akshay Hiregange and vetted by CA Madhukar N Hiregange. The author can be reached at [email protected]