GST taxpayers Jeopardy: Surge of Notices on mismatch of ITC

India is reaching towards the fourth year of implementation of Goods and Service Tax (GST) and the glitches can been seen being faced by taxpayers, professionals and even the GST department officials.

One of the major predicament is the technicalities under GST law including the process of matching and reconciliation of Input tax credit claimed in self-declared tax summary return GSTR-3B with data reflecting under the auto generated GSTR-2A.

Recently the GST department has been vigilant and a large number of taxpayers under GST have received notices under Form GST ASMT-10 in case of mismatch of ITC as claimed in GSTR-3B with GSTR-2A. Said notices are granting seven-ten days’ time period to rectify and match the discrepancy otherwise proceedings would be initiated against the assessee to pay the differential amount with interest and may subject to penal action.

Matching of ITC under GSTR-3B with GSTR-2A – Explained

GSTR-3B is the summary of tax return to be mandatory filed by the assessee by 20^th of every month providing the summary of sales along with tax thereon and total ITC claimed.

GSTR 2A is a purchase-related tax return that is automatically generated for each assessee by the GST portal . GSTR-1 contains the invoice wise details of sales of taxpayer during a relevant month/ quarter. When the vendor/ seller files its GSTR-1 return, the information is captured in GSTR 2A. Thus, GSTR-2A is auto-generated by the system on the basis of information of goods and/or services which have been purchased in a given month from the vendor/ seller’s GSTR-1.

Originally, it was planned that taxpayers can submit returns showing their invoice wise purchases and the related input tax credit in GSTR-2. Thereafter, the final tax due, be calculated and paid via submission of GSTR-3. Consequently the reconciliation was expected to be done on GSTN at the backend. However, such filing of comprehensive returns with invoice-matching facility was suspended following complaints of huge compliance burden and also the GST Network’s inability to handle the traffic. Due to technical and operational issues, it is still not adopted.

While the filing of GSTR-2 has been kept in abeyance, it is still important under the GST framework for the taxpayers to reconcile the ITC claimed in GSTR-3B and GSTR-2A by comparing the details in these two forms in order to ensure correct availment of ITC.

Though, this reconciliation will rectify the apparent discrepancies such as incorrect details recorded by supplier, invoice not recorded by supplier at all, duplication of claim of ITC, etc. However, issues arising due to difference in timing of issue of invoice and receipt of goods/ services, variance in time of filing GST returns monthly/ quarterly, ineligibility of ITC, contradicting circulars over a period of time, frequent changes in law, technical incompetence of GSTN portal will leave the taxpayer in jeopardy.

GST law on mismatch issue

Mandatory reconciliation

Amendment in Rule 36 of CGST Rules by inserting sub rule (4) w.e.f. October 09, 2019 has resulted in mandatory reconciliation of invoices and GSTR-2A.

Mismatch upto 10% (20%) allowed

In view of the sub rule (ibid), upto 20% of eligible credit can be availed by assessee in respect of invoices/ debit notes, the details of which has not been uploaded by supplier. Recently effective from the January, 01 2020, said 20% ITC has been replaced with 10% ITC. Thus, taxpayers not uploading relevant invoices with their returns will be eligible only for 10% ITC as on date.

Penal action and prosecution

In case it is found that mismatch is due to credit taken on the basis of fake invoices, strict penal action will be taken as per the provisions under the GST legislation, making it a non-bailable offence. The move has brought recently in Budget 2020 and has already been approved by the GST Council.

What a tax payer should do

Despite the GST Network not providing the facility of filing GSTR-2 right now, the assessee should start using GSTR-2 vis-a-vis GSTR-2A to ensure that the input tax credit claimed in its GSTR-3B is reconciled. The exercise should be done on monthly basis. This will help the assessee to provide evidence of tax contents in the goods and services they consumed and thereby validate the credits claimed.

Since GSTR-2 provides details on the status of suppliers’ tax filing, the assessee can ensure that its suppliers are paying taxes on time so that it can claim ITC without any hurdle.

Admittedly the exercise will consume cost and time but it will save the assessee business from loss of eligible credit at later stage along with interest thereon and the time and cost involved in departmental proceedings later on.

Further, it will give assessee control over choosing a vendor by adopting grading method and thereby delisting the non-complaint vendors. The assessee can also have the key advantage while amending/ renewing the agreement/ contract with the vendors by linking their payments based on payment of GST to government and subsequent filing of returns with correct details.

Conclusion

Technicalities of GST implementation in India have been criticized by global financial institutions/industries, sections of Indian media and opposition political parties in India. World Bank’s 2018 version of India Development Update described India's version of GST as too complex, noticing various flaws compared to GST systems prevalent in other countries. Indian businessmen have also criticised GST implementation for problems including tax refund delays and too much documentation and administrative effort needed.

Criticism always gives scope for improvement and new learning. The need of hour is adapting and upgradation in current processes and techniques by taxpayer in their business with the aim towards being more compliant to GST law.

At the same time, the lawmakers should also come forward to apprehend the hardships and practical hitches at the taxpayers end and address such issues by way of clarification/ trade notices, etc. Further, it should be ensured that no penal action is taken against assessee in case of technical difficulties with an immediate action to ensure that department officers should pursue notices relating to mismatch in non-coercive manner.