The curious case of ITC mismatch

The goods and services tax (GST) has co­m­pleted one ye­ar of its implementation. Introduced as one the biggest tax reforms of the country, GST subsumed various indirect taxes and it was aimed to streamline the indirect taxation structure of India. But in the last one year, GST has seen numerous tweaks by way of notifications, circulars and various clarifications by the government. One of the major challenges faced by GST stakeholders and businesses alike was on the technology front. The sheer scale of tax reforms resulted in technical glitches in tax payment, reporting and the flow of input tax credit (ITC).

Due to such technological glitches, the regular return filing system relating to GSTR 1, GSTR 2, and GSTR 3 could not be implemented. This led to introduction of a new self-declared monthly summary return as GST 3B. The due date of monthly GSTR 1 was extended for initial six months. Further, return filings in forms GSTR 2 and GSTR 3 were also postponed and, subsequently, kept in abeyance.

While this new way of filing became business as usual in no time, a new issue has arisen for businesses in the form of departmental enquiries. Recently, GST authorities have started issuing notices seeking explanation for the difference in input tax credit availed in GSTR 3B and GSTR 2A available online. The requirement from GST authorities seems fairly simple at first. But a deeper analysis brings to li­g­ht various reasons why this exercise may not be the corr­e­ct approach to determine eligible input tax credit that may be availed by each business.  Input tax credit is the credit manufacturer's recei­v­ed for paying input taxes towards inputs used in the ma­nufacture of products. Similarly, a dealer is entitled to input tax credit if he has purchased goods for resale. All dealers are liable for output tax on taxable sales done in the process of his business.

The missing link

ICEGATE (Indian customs electronic commerce gateway) portal holds details of customs duty and GST paid on the import of goods. Taxpayers are generally eligible to input tax credit of GST paid on import of goods and avail the same at the time of filing of GSTR 3B. One of the biggest issues is the non-linking of ICEGA­TE portal with GST portal. As a result, details of such GST paid on imp­orts are not updated on GST portal and GSTR 2A on­ly captures det­a­ils of domestic procureme­nt. Such non-availability of info­r­mation results in a mism­at­ch in input tax credit. It resu­l­ts in excess credit ava­iled in GSTR 3B return compared with GSTR 2A. As a result of GSTR 2 filing being extended and subsequently being kept in abe­yance, the system -based reconciliation of mat­c­hing of inward supplies ava­i­led by recipient with details in GSTR 2A was also kept in abeyance until further notice.

The department’s enq­u­iry seeking explanation of excess of input tax credit clai­m­ed in GSTR 3B stands on the use of the form that has not been operationalised for the taxpayer since the incept­ion of GST. This may result in an incorrect picture of mi­smatch between the two for­ms, as the facility to add, amend or delete inward invoices, as reflected in GSTR 2A, is not available with the taxpayer.

There are a plethora of ot­h­er reasons on why input tax credit may not match betw­een the two forms, such as:

*Postponement of availability of input tax credit by the recipient.

*Details of input tax credit pertaining to reverse charge transaction not featuring in GSTR 2A.

*Ineligible credits not availed by recipients but appearing in GSTR 2A.

*Non-compliance by supplier to submit proper details of invoices, incorrect classification, failure to discharge GST liability, delay in filing GSTR 1, etc.

All these reasons indicate clearly that reliance on figures appearing in GSTR 2A to determine eligibility of input tax credit may not lead to correct assessment. Such exercise should consider various aforementioned practical difficulties being faced by taxpayers before labeling any mismatch as tax evasion.

The above reconciliation exercise is not limited to only those businesses receiving departmental notices for mismatch. For availing missing input tax credit for July 2017 to March 2018, the GST law provides the last date for availing as due date of furnishing of September 2018 GST return or furnishing of annual return, whic­hever is earlier. The annual return format has been recently released and is yet to be operationalised. This effectively means that businesses have less than a mo­nth left to undertake input tax credit reconciliation and determine missing credits. Also, this information would also be required at the time of filing annual return.

Mislaid invoices

Further, new return filing sy­stem under GST seems to indicate that going forward the input tax credit availment co­uld be based on the invoices uploaded by supplier in GST return. In this respect, a facility could be given to the recipient to report missing in­voices to avail input tax cr­e­dit. It could again result in preparation of monthly reco­n­ciliation of procurements to determine missing invoices and report the same in GST return within two tax mon­ths. However, we would have to wait and watch how these aspects function in the new return filing system once it is implemented.

It is early to predict what course this exercise would take. But based on above issues the process of reconciliation of such details and providing proper explanation to authorities could be difficult for taxpayers.

 (The writers are senior director and manager with Deloitte Haskins and Sells)