Invoice Management System – old wine in a new bottle?

Introduction

On September 3, 2024, the GSTN issued an advisory on the Invoice Management System (IMS). This advisory seems a precursor to potential changes that might be unveiled during the 54th GST Council meeting, set to take place on September 9, 2024, in New Delhi. Upon closer inspection, the advisory brings to mind the old saying: old wine in a new bottle!

Why the reference to old wine?

Let’s take a trip down memory lane to May and June 2017. At that time, the GST was about to be introduced, and there was a great deal of excitement surrounding the new filing system involving GSTR-1, GSTR-2, and GSTR-3. The compliance requirements for taxpayers were as follows:

1. GSTR-1: Details of outward supplies were to be filed in GSTR-1 by the 10th of the following month.

2. GSTR-2A and GSTR-2: Invoice details submitted by the supplier in GSTR-1 would auto-populate GSTR-2A for the recipient. When preparing GSTR-2, the recipient was expected to either accept, delete, modify, or park invoices that appeared in GSTR-2A. After completing the process of accepting, modifying, rejecting, etc., the recipient was required to file GSTR-2 by the 15th of the next month.

3. GSTR-1A: Any modifications made by the recipient would be sent back to the supplier in the form of GSTR-1A. If the supplier accepted the changes made by the recipient, then the supplier’s GSTR-1 would be automatically updated; otherwise, the original GSTR-1 would remain unchanged.

4. GSTR-3: GSTR-3 was to be filed by the 20th of the next month, along with the payment of the tax.

What happened after these initial plans were set is well-documented in the history of GST. ANX-1 and ANX-2 were never implemented and therefore withdrawn from the statute.

So, what is the new bottle?

The “new bottle” refers to the updated procedures under IMS. Here’s a glimpse of how the new system is set to work:

1. Instant reflection of Invoices: As soon as the supplier saves an invoice, the details of that invoice will be instantly displayed on the recipient’s IMS dashboard.

2. Recipient’s provisional actions on Invoices: The recipient can take specific actions on the invoices displayed in the IMS dashboard—such as accepting, rejecting, or keeping them pending.

3. Amendment of Invoices by Supplier in R-1: If the supplier amends the details of a saved invoice in GSTR-1, the amended invoice will automatically replace the original invoice in the IMS, notwithstanding the action taken by the recipient in step 2 above.

4. Filing of outward supply details by Supplier: Supplier will file outward supply details in GSTR-1/IFF (Invoice filing facility for quarterly return suppliers) by 11/13 day of the next month.

5. Auto-Population of Invoice details in Draft GSTR-2B: The invoice details will be auto-populated in the draft GSTR-2B only after the supplier files GSTR-1 or IFF. Similar to the current system, the draft GSTR-2B will be made available to the recipient on the 14th day of the subsequent month.

6. Recipient’s Options for Invoices appearing in IMS: With respect to invoices appearing in IMS Recipient can either accept or reject or simply keep it pending or choose to do nothing in the system. The recipient is expected to complete this exercise before filing GSTR-3B. Under IMS actions taken by the recipient on each invoice will have specific consequences, particularly regarding the availability of ITC in GSTR-3B. Here’s how different actions impact the recipient’s GST returns:

6A. Accepted Invoices: If the recipient accepts an invoice after the supplier has filed GSTR-1, the accepted invoice will be included in the recipient’s GSTR-2B. Consequently, the recipient can claim ITC for these invoices in their GSTR-3B.

6B. Rejected Invoices: If the recipient rejects an invoice, it will not be included in the recipient’s GSTR-2B. Importantly, the recipient cannot claim ITC for any invoices they have rejected.

6C. Pending Invoices: If the recipient marks an invoice as pending, it will not be included in the current month’s GSTR-2B. These pending invoices will remain in the IMS and be carried forward for future action. The recipient cannot claim ITC for these invoices in the current month’s GSTR-3B but may do so in a future GSTR-3B once the invoices are accepted, subject to limitations explained in step 10 below

6D. No Action Taken (Deemed Acceptance): If the recipient takes no action on an invoice, the system will automatically consider the invoice as accepted for GSTR-2B purposes. Deemed acceptance carries the same legal consequences as active acceptance, meaning the recipient can claim ITC for these invoices in their GSTR-3B as per step 6A.

Ideally, recipients should focus on either rejecting or marking invoices as pending, the system will handle the rest

7. Re-computation of GSTR-2B Before Filing GSTR-3B: Ideally, the recipient should re-compute GSTR-2B before filing GSTR-3B. This re-computation will capture the effects of any actions taken on invoices, such as acceptance, rejection, modification, or keeping them pending.

8. Pushing ITC to GSTR-3B: ITC as determined by the re-computed GSTR-2B will be automatically pushed to GSTR-3B. This will alleviate the issue of unmatched/mismatched ITC.

9. Impact of subsequent amendment of invoice by supplier: If the supplier amends any invoice through GSTR-1A (after filing their GSTR-1 but before filing their GSTR-3B), the amended invoice details will be updated in the IMS. Please take note while the supplier is required to adjust/pay the GST for the amended invoice in their current month’s GSTR-3B, the recipient will only be able to adjust/claim the ITC for that invoice in their GSTR-3B for the following month.

10. Claiming ITC for pending Invoices: The recipient can claim ITC for invoices marked as pending at any future point in time. However, this must be done within the time limits prescribed by Section 16(4) of the Act, which is no later than the 30th of November of the next financial year.

11. GSTR-2B generation for Quarterly Filers: For recipients who file their GST returns quarterly, GSTR-2B will only be generated quarterly. This means that for the first and second months of the quarter, no GSTR-2B will be generated for such taxpayers. Instead, GSTR-2B will be prepared at the end of the quarter, consolidating all the relevant data for that period.

12. Visibility of Recipient’s Actions to the Supplier: The supplier will have the ability to view the actions taken by their recipients on the invoices in IMS

13. Restrictions on ‘Pending’ Action: The option to mark an invoice or document as ‘pending’ will not be allowed in the following scenarios:

• • Original Credit Note Uploaded by Supplier: The recipient cannot mark the original credit note as pending.
  • Upward amendment of a Credit Note: If there is an upward amendment to a credit note, it cannot be marked as pending, regardless of the recipient’s action on the original credit note.
  • Downward amendment of a Credit Note: If the original credit note was rejected by the recipient, any downward amendment to that credit note cannot be marked as pending.
  • Downward amendment of Invoice/Debit Note: If the original invoice or debit note was accepted by the recipient and the respective GSTR-3B has already been filed, any downward amendment to that invoice or debit note cannot be marked as pending.

For the above transactions, if the recipient chooses to take no action, the system will treat this as a deemed acceptance.

14. Impact of Rejected Transactions on Supplier’s Liability: For certain transactions where the recipient rejects invoices or records in IMS, the supplier’s liability will increase in GSTR-3B for the subsequent tax period. This adjustment applies to the following scenarios:

• • Original Credit Note Rejected by the Recipient: If the recipient rejects the original credit note, the supplier’s liability will increase in the next GSTR-3B.
  • Upward Amendment of a Credit Note Rejected by the Recipient: If there is an upward amendment to a credit note and the recipient rejects it, regardless of the action taken on the original credit note, the supplier’s liability will increase.
  • Downward Amendment of a Credit Note Rejected by the Recipient: If the recipient rejected the original credit note and then also rejects any downward amendment to it, the supplier’s liability will increase.
  • Downward Amendment of an Invoice/Debit Note Rejected by the Recipient: If the recipient had accepted the original invoice or debit note, filed the respective GSTR-3B, and then subsequently rejected a downward amendment to that invoice or debit note, the supplier’s liability will increase.

It seems restrictions in steps 13 and 14 above are to protect the interest of the revenue.

15. Supplies Excluded from IMS and Directly Populated in GSTR-3B: The following supplies will not go to IMS and will be directly populated in the GSTR 3B –

• • Inward RCM supplies where the supplier has reported in Table 4B of IFF / GSTR 1 or GSTR 1A and
  • Supplies where ITC is not eligible due to section 16(4) of CGST Act or on account of POS rule.

16. Removal of Processed Records from IMS Dashboard: All records that have been accepted, deemed accepted, or rejected by the recipient will be removed from the IMS dashboard after the filing of the respective GSTR-3B.

After exploring the intricacies of IMS, it’s evident that while the packaging may have changed, the core principles remain largely the same.

When will IMS be made operational?

The IMS facility is expected to be available to taxpayers starting from October 1, 2024, on the GST portal. Consequently, GST returns filed for the month of September or for the quarter ending September 2024 will continue to be governed by the existing system.

Government should also pay heed to wish list of taxpayers

With GST return compliance set for a major overhaul from October 1, 2024, taxpayers need to prepare for this change well in advance. Professionals will also be on high alert until the IMS stabilizes.

GSTN Advisory boldly claims that IMS will provide taxpayers an opportunity to review the genuineness and authenticity of the received invoices. In hindsight, the postponement and thereafter withdrawal of GSTR-2 and GSTR-3 were the inopportune moments in the history of GST Compliance. In my personal view if GSTR-2 & GSTR-3 remained active some of the following issues being presently faced by bonafide taxpayers would have been solved or at least minimized:

• SCN after a substantial gap from the date of availment of ITC alleging the recipient has availed ineligible ITC i.e. violation of Sectio 16(2)(c) of the Act.
• SCN alleging that supplier is a Hawala dealer/ NGTP (Non-genuine Taxpayer)
• SCN alleging recipient is fictitious or not in existence
• SCN alleging transactions in question are paper trade / accommodation
• SCN alleging mismatch/unmatched ITC

Hopefully, post successful implementation of the ITC locking mechanism in the form of IMS bonafide taxpayers may find relief from the above-mentioned allegations

To conclude

The government has previously attempted to implement a GST return-locking mechanism twice. The first attempt was in 2017 with the introduction of GSTR-1, GSTR-2, and GSTR-3. The second attempt came in 2020 with GST ANX-1 and ANX-2. Both initiatives were abandoned due to technical issues with the GST portal. However, with advancements in technology, it is expected that this time the necessary precautions have been taken to ensure a smooth, glitch-free rollout of the system.

Moreover, the newly introduced Section 74A, effective from April 1, 2024, allows for the issuance of SCN within 42 months from the due date of filing the annual return for that period. Taxpayers should advocate for and hope that, following the successful implementation of the ITC locking mechanism, combined with other tools such as e-invoicing, e-way bills, and other anti-evasion measures, the government will reconsider this extended timeframe for issuing SCN and bring it to a more reasonable duration.

Under the current system, honest purchasers feel as though they are constantly at risk, with the “Sword of Damocles” hanging over them, fearing that they may be required to reverse their ITC along with interest and penalties.