Say Hi-Five to Input Tax Credit Reconciliation in GST

One of the notifications issued recently talks about the input tax credit to be availed by taxpayers on a provisional basis up to 20% of the eligible credit available in the GSTR – 2A. This is notified wide Notification No 49/2019 – Central Tax, dated 9th Oct 2019.

What does it mean?

It means that recipients cannot enter the Input Tax Credit Amount arbitrarily in GSTR – 3B, they have to enter the input tax credit amount based on the eligible invoices uploaded by the suppliers in their GSTR – 1, which are in turn reflected in the recipients GSTR – 2A.

It also means that they cannot claim the input tax credit based on their purchase register even though they have received the goods or services or both and a copy of the original invoice is also there with them.

The recipient will come to know about the input tax credit he is eligible to take only when the supplier files his GSTR – 1, till such time he cannot claim the credit. This means the recipient has to change his accounting practice.

The wordings used are “eligible” in the notification, this means the recipient has to identify the inward supplies on which input tax credit can be availed and after deducting the ineligible amount, the eligible amount will be determined and claimed by him in GSTR – 3B.

If the recipient has some invoices which are not uploaded / filed by the supplier, he cannot take the credit fully but he can take the credit to the extent of 20% of the eligible credit.

Apart from the above change, the following are also to be considered

1. What is the effective date of the Notification No 49/2019 – Central Tax dated 9th Oct 2019?

The effective date of the notification is 9^th Oct as the notification reads that the applicability of the said notification is from the date on which it is officially published in the Official Gazette. It is published in the Official Gazette on 9^th Oct 2019 only.

It means that while filing the GSTR – 3B for the month of September 2019, the input tax credit amount has to be computed on the basis of the GSTR – 2A and not on the basis of the purchase register.

2. How to compute the Input Tax Credit?

Example – say the taxpayer has an inward supplies of Rs 25,000 during the month from three different suppliers A, B & C for an invoices of Rs 10,000 form A, Rs 10,000 from B and Rs 5,000 from  C and assuming the tax rate is 10%, the recipient can claim Input tax credit of Rs 2,500 and the same is being claimed in GSTR – 3B.

Assuming that Supplier A & C have only filed their GSTR – 1, then the amount reflected in GSTR – 2A of the recipient is only Rs 15,000.

As per the new provisions, the recipient can claim only 120% of Rs 15,000 i.e. Rs 1,800 only assuming all the inward supplies are eligible for the input tax credit.

Say for the inward supplies by A, the recipient has used the inward supplies for personal use and for employees, then the amount of eligible input tax credit will be Rs 500 (10% of Rs 10,000 plus 10% of Rs 5,000).

3. Is there any change in my accounting entries?

Yes, there will be a change in the accounting entries also. As the credit is being availed only in matching, then input tax credit ledger has to be updated only on matching and not at the time of entry of purchase entry or receipt of the goods. If change is made the accounting, then it will be help in reconciliation and also helps in following up with the errant suppliers and also in line with the accounting practices.

The accounting entries the recipient is passing at the time of accounting for goods or services or both currently is as follows

Ledgers	Debit / Credit
Inventory / Services A/c	Dr
Input Tax Credit – CGST A/c	Dr
Input Tax Credit – SGST A/c	Dr
To Supplier’s Account / Creditors A/c	Cr

With the new notification, the recipient has to change the accounting entries and pass these accounting entries

Ledgers	Debit / Credit
Inventory / Services A/c	Dr
Provisional Input Tax Credit – CGST A/c	Dr
Provisional Input Tax Credit – SGST A/c	Dr
To Supplier’s Account / Creditors A/c	Cr

Once the supplier files his GSTR – 1, the same is reflected in GSTR – 2A of the Recipient. The Recipient has to do a reconciliation of the invoices reflected in GSTR – 2A with his purchase register and then only determine the eligible input tax credit. The reconciliation can be carried out by the recipients manually or using third-party solutions or built-in solutions in the Accounting / ERP products. Basis on the reconciliation, for the invoices uploaded by the supplier, the input tax credit can be availed and updated in GSTR – 3B, for this the Recipient has to pass the following accounting entry

Ledgers	Debit / Credit
Input Tax Credit – CGST A/c	Dr
Input Tax Credit – SGST A/c
Provisional Input Tax Credit – CGST A/c	Cr
Provisional Input Tax Credit – SGST A/c	Cr

For these, to happen the accounting ledgers have to be created state-wise (if the Recipient has a multi-state presence). The accounting entries can be auto-generated if the Accounting or ERP of the Recipient is supported, this will save lot of human efforts and remove room for human errors.

4. Will there be any increase in the working capital?

Yes, there will be an increase in the working capital, if we see the above example the recipient has to discharge the tax liability in cash to the extent of Rs 700.

Sl. No	Particulars	Amount (Rs)	Workings
A	ITC as per existing process	2,500	Rs 25,000 X 10%
B	Invoices uploaded by the supplier	15,000	Invoice of Supplier A & C
C	ITC available basis of GSTR – 2A	1,500	10% of B
D	Provisional ITC	300	20% of C
E	Additional GST Liability to be paid	700	A – (C+D)

5. What is the treatment of taxes paid under Reverse Charge?

In GSTR – 3B, reporting of the input tax credit for the reverse charge is different and it can be claimed as in the existing process as there is no mention of the same in the said notification.

6. What is the treatment for Taxes paid on the import of goods?

IGST has to be paid on import of goods, and the same is reported separately in GSTR – 3B, so it will continue to follow the existing process as there is no mention of the same in the said notification.

7. What should be the treatment if the invoices are uploaded or filed by the supplier in subsequent months?

This is a real challenge as there is a provision in the Act / Rules that the supplier can upload or file his return if he has missed it previously. Say for example if the supplier has missed uploading a particular invoice in the month of Oct 2019, he can upload  the same in the month of Nov 2019. As per the current process, the missing invoice uploaded in the month of Nov 2019 will be still reflected in the GSTR – 2A of Oct 2019. The recipient has to keep revisiting the GSTR – 2A’s till the filing of annual return or the due date for the filing of the September month’s return in the next financial year or second quarter following the end of the financial year.

For this the recipient has to maintain a proper track of records / workings for which invoice he has claimed the input tax credit in a particular month. This will ensure to reply to the notices, which can be issued by the department under various provisions from time to time.

8. What will happen if corrections are made by the supplier for the previously uploaded invoices and filed?

The corrections made by the supplier in the subsequent month will be reflected in the GSTR – 2A of the month during which the original invoice is reported. This means the Recipient has to keep track of such changes and act on it accordingly. If the changes are carried out by the supplier after filing of the annual return, then the differential tax amount reduced by the supplier has to be paid as additional tax liability in the month it is observed or in the annual return along with interest.

Ideally this case will not arise in the new return formats, as once the recipient accepts the invoice, it gets locked and the supplier cannot make any changes. But this can be an issue in the existing returns.

9. What happens if the supplier does not file the returns / uploads or pay the taxes at all?

If the supplier does not file the returns or uploads the invoice or pays the taxes, then the recipient cannot take in the input tax credit, the taxes paid by the recipient to the supplier have to be absorbed as expenses in the P & L.

10. What is the treatment of the provisional 20% input tax credit availed in the subsequent months?

The provisional 20% credit availed will be not at the invoice level but will be on the basis of the GSTR – 2A total amount. The treatment for the provisional credit availed has to be reversed if not matched within 60 days. Now the question arises at it is taken on the amount not to a specific invoice, how to determine the same?

Say for example there are five invoices that the buyer is having and not uploaded by the suppliers in the month during which the invoices have been issued. One of the supplier uploads / files the same in the subsequent month, now how to knock off the 20% amount?

Sl. No	Supplier	Invoice No	ITC Amount (Rs)
1	A	A123/19-20	20,000
2	B	24859	25,000
3	C	19-20/000056	10,000
4	D	10001/SER/1920	40,000
5	E	654648	30,000
Total			1,25,000

The total ITC for all the above invoices amounts to Rs 1,25,000 and the eligible amount as per GSTR – 2A is Rs 3,40,000.

Basis of the new provision, the amount of provisional credit to be availed is Rs 68,000 (Rs 3,40,000 X 20%).

Total amount claimed is Rs 4,08,000 (Rs 3,40,000 + Rs 68,000).

In the next month the Suppliers D & E have not filed the returns, which means in the next month the recipient has to consider Rs 55,000 (Rs 1,25,000 – Rs 70,000) from the previous months GSTR – 2A. For the differential amount Rs 13,000 (Rs 68,000 – Rs 55,000) interest has to be paid and outward tax liability has also to be increased to the extent of Rs 13,000.

To pay interest and pay additional tax is simple but trade and industry have to maintain lot documentation and reconciliations have to be made properly.

In the second month, again the process of deriving provisional credit will continue and accordingly the accounting entries are also to be generated / passed.

11. Will the small taxpayers who are filing their returns on a quarterly basis will be impacted?

The taxpayers who are filing the returns on a quarterly basis may be impacted. The large taxpayers may force the small taxpayers to file the returns on a monthly basis as they cannot claim the input tax credit until they file the returns.  Under the new system they can take credit only after the small taxpayer files the returns. This adds more pressure on the large taxpayers when it comes to the cash flows, so they automatically tend to pressurize the small taxpayers to file returns on a monthly basis.

12. How to overcome the challenges of taking provisional credit?

It is purely taxpayer’s call to take provisional credit or take only as and when the amount is reflected in GSTR – 2A.

13. Are there any other means to handle the cash flows effectively and avoid the pains of availing the provisional credit?

Cost benefit analysis has to be carried out by the taxpayer’s and also, they should bring in operational discipline in their business process.

a) At the time of procuring the goods or services or both, evaluate the supplier’s GST compliance also apart from the quality, price, post supply service along with other parameters.

b) Continuous and vigorous follow up with the suppliers for their GST compliance.

c) Explain the suppliers and train them if required on the GST Compliances from time to time.

d) Carrot and stick theory can be used by the recipients. They can give extra orders if they are GST compliant or reduce the orders placed on such errant suppliers who are not GST Compliant.

The above changes in the business process clearly reiterate that GST is not a tax reform but a business process reform.

The trade and the industry are expecting that reconciliation will be introduced as part of the new returns to be rolled out from 1^st April 2020 but the notification has come as a kneejerk reaction to all the stakeholders. It looks like the Government is also not having any choice as the GST collections are coming down for the past few months. Trade and professionals have to consider the same while filing their GSTR – 3B for the month of Sep 2019 along with the other activities to be considered for filing as it is the last month for availing the input tax credit related to the financial year 2018-19.

With the challenges being faced by the industry we can only hope that the Government may extend the amendments to Rule 36 of CGST Rules 2017 to 1^st April 2020 or 1^st Jan 2020 and till such time we have to adhere to the laws of the land or face penalties.

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