Almost each and every business house and indirect tax consultant is struggling with the matching of GST input credit taken with the credit appearing the 2A reports. By now, every GST registered entity has done GST credit reconciliation atleast for the years 2017-18 and 2018-19. Even with the enormous efforts, most of the registered entities and the consultants are not satisfied with the results. But why the reconciliation of GST input credit with GSTR 2A report is so complex? Why with all the expertise, business houses and consultants are not able to come out of this challenge?
The challenges associated with reconciliation of GST Input Credit with 2A report may broadly be divided in two categories, viz,
1. On account of action of Supplier
a. Supplier has not filed GSTR 1. Except a nominal late fee, there is no penal action against the supplier for not filing the GSTR 1. There is lack of any incentive or compulsion to file GSTR 1 on time.
b. Supplier has filed GSTR 1 but reported B2B supplies as B2C supplies. This is very common instances in case of hotel industries.
c. Supplier has reported invoices under wrong GST Registration Number. This type of mistake in very common in cases where buyer has multistate/location operations and have multiple GST Registration Numbers.
d. Supplier has reported Invoices properly in GSTR 1 but amendment certain invoices later on without any intimation to buyer.
2. On account of GSTN Portal/Credit matching process
a. 2A report of a particular month keeps on changing as and when updation is done by supplier. So ideally, reconciliation of a particular month is never closed and it is required to reopen and redone time and again.
b. Credit note and amendment in invoices make it more difficult to link invoices appearing in 2A report and recorded in buyer’s books of accounts.
In addition to above, there are many challenges for buyers in maintaining their records and to have a robust accounting and GST reporting system. I assume, as buyer has to take input credit, buyer accounting and reporting system is efficient enough to handle the requirement.
Further, with the below amendment vide Notification No. 49/2019 –Central Tax dated 9th October 2019, the input credit is capped to 120% of the amount appearing in 2A:
“(4) Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 20 per cent. of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37.”.
So the situation is going to be worse as this amendment, inter-alia, requires monthly reconciliation of GST input credit as per books of accounts vis-a vis input credit appearing in 2A.
The complex process of matching and the mistakes by supplier, either knowingly or otherwise, are leading to a situation of non-availability of input credit to the genuine buyer. It is the buyer, who is in possession of a valid Tax invoice, who has received the goods & services and who has made payment to the supplier but still for none of their mistake, buyer is deprived of the GST input credit.
An alternative solution for this issue may be to make the buyer responsible to pay tax for supplies received by them. Meaning, B2B supplies may be covered under Reverse Charge Mechanism (RCM). So the buyer has to pay GST on the inward supplies and take the input credit of the GST so paid, if eligible and adjustable. This process will eliminate the complex process of Input Credit reconciliation. With application of RCM on B2B supplies, the Government will also be relieved from the mammoth works of creating system/infrastructure for new return system, which is yet to get tested for the real load of data.
The Government and the industries may face initial hiccups in the process, but the benefit will be enormous. A well-studied RCM provision on B2B supplies with some threshold limit, as may be required, will have a very far reaching positive effect.