India’s adoption of the GST law has been preceded by a narrative of national aspiration and global exceptionalism. The government has been working to make the overall GST framework for India Inc. easier by changing the reporting process to make GST a “Good and Simple Tax” so that only conscientious assesses are not affected and non-compliant assessors are questioned or made accountable.
One such modification was recently announced by the government in the document For information pertaining to Input Tax Credit (ITC), see Notification No. 14/2022 – Central Tax in Table 4 of GSTR 3B, dated July 5, 2022. Since September 1, 2022, the aforementioned improvements have been made available on the GST portal. The following two aspects have seen significant modification thanks to the government:
1. Mandatory reporting of reversals resulting from permanent, non-recoverable ineligible ITC in Table 4(B)(1), such as blocked credits under Section 17(5), reversals resulting from the exempt supply, etc.
2. Reporting ITC reversals that are temporary in nature in Table 4(B)(2) and reclaiming the same information in Table 4(A)(5) with detailed reporting of the said information in Table 4(D)(1) as well [this is a new Table added today]. This will include ITC reversals due to 180-day late payments to vendors, ITC reversals that appeared in GSTR 2B but were not recorded in the books, etc.
Prior to the implementation of the GST rules, the two adjustments in reporting of ITC reversals mentioned above were also necessary. The bulk of taxpayers, however, did not strictly adhere to the modifications, and only eligible ITC, ITC accessible, and ITC-reversed were recorded in GSTR 3B. These adjustments will improve taxpayer reporting clarity and assist investigators in tying GSTR 3B data to books for improved tax administration.
Additionally, the government has specific goals in mind when making these changes, including (a) auto-populating and correlating GSTR 3B information with GSTR 2B and GSTR 9 information with GSTR 3B; and (b) ensuring consistency in the procedure followed in reporting ineligible ITC as well as various ITC reversals in GSTR 3B. However, this has now increased the complexity associated with submitting GSTR 3B, which was initially intended to be a “summary return.”
We have outlined several problems related to these developments below based on our conversations with specific clients at various stages and our own experience helping such clients with their regular compliance:
Non-accounting of ineligible ITC under section 17(5) separately in ERP-
The majority of businesses organize their accounting procedures for vendor invoices so that the GST amount, which is not eligible for ITC, is not recorded separately but rather the entire transaction amount is booked in the expenditure GL itself. As a result, it is challenging to obtain a report on invalid ITC booked over time. Companies will need to restructure the aforementioned process in light of the most recent amendment and have a separate GL/report for ineligible ITC, but this should involve numerous configurations in their individual ERP systems) as well as in their AP process, which is both time-consuming and expensive.
True up/true down in the reversals made under Rule 42 at year-end –
Rule 42, sub-rule (2), requires the taxpayer to either reverse the deficit ITC amount that was not reversed earlier or to take advantage of the ITC amount reversed in excess in monthly returns. This recalculation of the ITC on account of exempt supplies is done at year-end based on the turnover of the entire financial year.
In this sense, the monthly reversals made pursuant to Rule 42 may not be regarded as absolute, and the taxpayer may need to reclaim them in the future. It appears that the government has neglected to recognize this clause and specify the process for making the aforementioned amendments. Soon, this issue should become clearer. Similarly, if there is any inadvertent mistake in reporting of information in Table 4(B)(1), there is no mechanism explicitly provided for correction of the same.
The requirement to reconcile all transactions of GSTR 2B, including ineligible ITC –
According to the explanation provided in Circular No. 170/02/2022-GST dated July 6, 2022, it is clear that a taxpayer must disclose the data in Table 4(A) as it appears automatically in GSTR 2B for the relevant month. This requires comparing the GSTR 2B’s line items, including the ineligible ITC, to the corresponding month’s purchase register. This is necessary in order to accurately record ITC reversals in Table 4(B) and to guarantee that the “Net ITC availed” amount in Table 4(C) is consistent with the ITC amount reported in the books. Without a question, this will make taxpayers’ compliance obligations more onerous, particularly for businesses.
- Not having immediate access to ineligible ITC data from their ERP;
- Due to a lack of data, using the manual option to reconcile their eligible ITC with GSTR 2B;
- Having exclusively exempt supplies and not being eligible for any ITC (such as companies involved in the production and sale of energy), but since the ITC numbers will still auto-populate from GSTR 2B, they will need to reconcile the same and make sure to reverse the same.
Non-consideration of reversals Table 4(B)] by the tax department while issuing notices on ITC reconciliation-
These days, the tax administration routinely sends letters to taxpayers regarding differences between the ITC availment amounts reported in GSTR 3B and their respective GSTR 2A/2B. The department does not take into account the number of reversals being made by the taxpayer in Table 4(B), and the amount of GSTR 2A/2B considered is different from the amounts actually available on the GST portal, according to some key observations from the majority of these notices (across various states). This has led to a number of situations where taxpayers have received notices for ITC that have already been reversed in GSTR 3B for the same month. Considering the changes, we expect that there will be a further increase in the instances of such defective notices being received by the taxpayers, thereby overburdening the taxpayer with more compliance-related work.
While the government wants to stop tax leakage and drive it digitally, they should also think about making the GST filing process more affordable and user-friendly, rather than making it a complex and expensive process that would require robust technology and back-end support from trained professionals, as this propensity towards correlating myriad reporting requirements and auto-populating various categories of data segments have confused the overall picture.