Seamless availability of Input Tax Credit (ITC) is the highlight of the GST regime. For any tax regime, the flow of credits is an integral part. It determines the cascading effect of taxes and the tax cost that forms part of each product to the ultimate consumer. Under the GST regime, the law specifies conditions which if fulfilled permits the taxpayer to avail credit. These conditions include:
- Possessing the tax invoice/ debit note/ any other document as prescribed
- Receipt of goods and/or services
- Tax charged by the supplier has been paid to the government
- GST summary return has been furnished
Further, the time limit to avail ITC is the date of furnishing the annual return or the return for the month of September following the end of the financial year. Furthermore, ITC is available only for the furtherance of business and for effecting taxable supplies. There are restrictions on ITC eligibility in respect of certain items such as motor vehicles, works contract services, food, and beverages, health services, etc. (with exceptions available). Additionally, the GST regime has envisaged allowing credits only if they match with the GST paid by the supplier.
Even after unambiguous law and rules were laid down, the Government observed several instances of claiming fake ITC based on bogus invoicing. This led to tightening of rules and laws to ensure only eligible ITC is being availed. Some of these rules are:
- Rule 36(4) of CGST Rules, 2017: As per this rule, a taxpayer is only allowed to avail ITC to the extent of 105% of the ITC reflected by the supplier in GSTR 2B.
- Rule 86A grants power to the proper officer to restrict the use of ITC from the Electronic Credit Ledger (ECL) in specified cases which includes that the officer has a reason to believe that credit has been fraudulently availed or is ineligible.
- Rule 86B restricts the use of ITC to the extent of 99% of output tax liability in specified cases.
With multiple rules and regulations in place, ITC provisions have become one of the most complex issues of the GST regime. It has become a task to decode all these provisions and apply them in everyday transactions. Thus, here is a checklist of top-10 items for taxpayers in respect of ITC provisions:
- Follow the law closely to determine the ITC that is eligible. Special attention needs to be paid to the items on which ITC is blocked by the law itself. Such ITC should not be availed in the first place.
- Conduct ITC reconciliations i.e., GSTR 2A vs GSTR 3B, GSTR 3B vs purchase register, etc. This activity should be done monthly.
- Check if all vendor payments are made within 180 days or not. In case the vendor payments get spilt beyond 180 days, the ITC needs to be reversed along with interest as applicable.
- Check if ITC availed is only in respect of business supplies and taxable supplies. Any ITC that pertains to exempt or non-business should be reversed. Reversals are also required in case of capital goods that are sold five years from the date of purchase.
- Review the ITC in respect of payments made under the reverse charge mechanism.
- In the case of multiple state-wise registrations of the same entity, if ITC is received at a common head office, such ITC needs to be distributed to the relevant GSTINs.
- Most organizations do not avail ITC of bank charges; however, it may be noted that no such restrictions have been prescribed by the law.
- In the case of taxpayers who have taxable supplies of more than INR 50 lakhs, the applicability of Rule 86B needs to be checked.
- Applicability of Rule 36(4) and availability of credit needs to be ascertained on a monthly basis.
- Check if ITC has been restricted by any rate notifications, for instance, real estate, restaurant, etc.
The above list is a broad checklist. However, there are multiple aspects that need verification for availment of ITC and hence this list can only be indicative in nature.
Why verification of ITC is important?
Incorrect availment of ITC can lead to penal consequences. The interest exposure can also go as high as 24% in case of the wrong availment of ITC. Hence, while the pecuniary cost is pinching, the litigation and time cost that may arise due to notices being issued cannot be neglected.
However, there is a wide discussion raging on the correctness of linking a buyer’s ITC with the condition of a supplier’s tax payment and filing of return. The argument being that credit is a buyer’s substantive right and should be available without any conditions attached especially conditions that are beyond any buyer’s control. Multiple petitions in various High Courts are pending on this aspect.
How can Technology help?
From the above backdrop, it is clear that ITC is a prone area to mistakes, errors, and frauds. Hence, it is important to have the right checks and balances in place. Technology can come to one’s rescue as far as availing appropriate ITC is concerned. The ASP solutions available have multi-layered checks and verification points which enable any taxpayer to avail ITC without any doubts. Whether it is adhering to Rule 36(4) requirements or checking vendor ageing or carrying out reconciliations, technology is geared up to handle it!