Input Tax Credit (ITC) under GST can become a vital cost factor for a business that, if mismanaged, can affect its working capital. The GST law lays down elaborate rules for claiming and utilizing ITC by every taxpayer.
Taxpayers are liable to pay a higher interest rate of 24 pe if they claim and utilise excess ITC. Moreover, if businesses claim or utilise or distribute ITC without receiving goods or services, they can be penalised. Hence, they should strictly follow the GST law and regularly reconcile their accounts with the GST returns to claim accurate ITC.
While monthly or quarterly reconciliations can help in the accurate filing of GSTR-3B, the annual reconciliation of books with GST returns will help fix any misses and errors that earlier went unnoticed. The annual reconciliation is essential due to the time limit fixed to claim ITC for a particular financial year and for GSTR-9 filing. ITC on purchase invoices or debit notes of a financial year can be claimed in the GSTR-3B of September of the year following that financial year or due date of filing annual return of that financial year, whichever is earlier. It applies to reversals of ITC as well.
Here is a simple annual ITC checklist for GST taxpayers to follow while closing their books of accounts for a financial year:
1. Reconcile ITC claimed in GSTR-3B with GSTR-2A
GSTR-2B has gained significance in recent months for the regular filing of returns. However, GSTR-2A continues to hold importance in the annual ITC checklist. It is due to the dynamic nature of the auto-drafted return. Vendors may have made amendments to B2B invoices of the earlier-filed returns in any of the subsequent tax periods. The buyer might have missed claiming the accurate ITC due to this amendment if not accounted for in his books.
Hence, the taxpayer must first download GSTR-2A for multiple months for the entire financial year to end in March. After that, he must compare ITC claims and reversals as per the GSTR-3B data for the financial year.
He should sort out the differences and claim any missing ITC yet claimed in the next tax period, usually April or the quarter ending in June. Further, he must identify and reverse any ineligible ITC earlier claimed in the next tax period. Suppose he identifies any ITC entry missing in GSTR-2A of GSTR-2B but accounted for his purchase books. In that case, he must bring this to the vendor's attention and nudge him to upload the corresponding sales invoice in the upcoming tax period.
The business must also track GSTR-2A up to September of the year following the financial year for any entries of that year. It will help them not miss out on the ITC of that financial year.
2. Match ITC claimed in GSTR-3B with purchase and expense books
The taxpayers must pull out their purchase and expense ledgers to match the same with GSTR-3B for the entire financial year from April of a year to March of next year. They must follow the same procedure as given above to identify any omissions or errors and correct them in the subsequent tax periods.
Care must be taken to not miss out on the GST on advances paid and the reverse charge transactions.
3. Reverse ITC where payments are pending for more than 180 days
If payment to the vendor is not made within 180 days from the invoice date, then ITC availed should be reversed in that particular tax period through GSTR-3B when the 180 days expires. For instance, the ITC claimed on an invoice dated April 2021 and remaining unpaid for more than 180 days must be reversed in GSTR-3B of October 2021 along with interest computed for six months. Note that this ITC can be re-claimed when payment to the supplier is made later on.
The taxpayer has to keep this on his annual checklist to avoid hefty interest liability.
4. Claim ITC on bank charges paid supported by an invoice
ITC on bank charges is available for claims by taxpayers. Many taxpayers often miss this claim and therefore must have an annual check in place. However, the taxpayers must ensure to comply with conditions outlined in Section 16 and 17 of the CGST Act. In other words, bank charges must have been paid for availing of banking service for business continuation only. These should not be ineligible as per Section 17(5). Further, the bank must have issued an invoice or a similar document with the GSTIN of the business mentioned therein. Therefore, the ITC entry must appear in GSTR-2B and GSTR-2A.
5. Reverse ITC, which is ineligible for claims
The GST law prescribes several scenarios when input tax credit cannot be claimed. However, if it is still claimed, then the taxpayer must reverse the same by paying it together with interest. There are cases such as purchases made for personal use but accounted for in business books, ineligible for ITC. Further, ITC claims related to the exempt sales must be proportionately reversed as per the formula given under the law. ITC on capital goods sold before the expiry of five years from the date of purchase attracts reversal based on percentage point reduction for actual use of assets.
To conclude, input tax credit forms a critical part of the annual GST checklist for all the regular taxpayers. Auditors and tax professionals also give it greater importance during their checks and verification. Therefore, taxpayers should not ignore the above checklist and follow it consistently for more accurate and easier preparation of GSTR-9 annual returns.
The author, Archit Gupta, is Founder and CEO at ClearTax. The views expressed are personal
First Published: IST