Post the advent of GST, the industry is facing a hard time in claiming eligible Input Tax Credits (ITC). Multiple rules, laws, provisions have been enacted to safeguard the revenue from false ITC claims and fraudulent invoices. These include blocked credit as per Section 17(5) of the CGST Act, 2017 such as ITC of construction expenses, expenses in respect of goods distributed as free samples, gifts, etc. Further, the primary conditions to claim ITC as per Section 16 also be fulfilled. Moreover, the following rules have further constricted the availability of ITC for an assessee:
- With effect from 1st January 2022, ITC in respect of invoices and debit notes shall be available only to the extent they are furnished in GSTR-1 by the vendors and thus appear in GSTR-2A/2B of the recipient.
- Rule 36(4) of CGST Rules, 2017 – ITC cannot be claimed in excess of 105% of eligible ITC reflected by the supplier in GSTR 2B.
- Rule 86A of CGST Rules, 2017 – A proper officer can block the Electronic Credit Ledger of a taxpayer if he has reasons to believe that credit has been fraudulently availed or is ineligible.
- Rule 86B of the CGST Rules, 2017 – In specified cases, the ITC can be used only to the extent of 99% of output tax liability.
With the above background, it can be easily comprehended that for availing eligible ITC, a taxpayer needs to follow the below steps:
- Fulfill all conditions laid down under section 16 of CGST Act, 2017
- Ensure that credit is not availed in respect of items listed under section 17(5) of the CGST Act, 2017
- Ensure compliance with Rule 36(4) periodically
- Adhere to all other business-specific restrictions and ITC reversals
Considering so many steps to reach the eligible ITC, it is only natural that ITC has become a major concern for organizations across the country.
The following challenges are typically faced by organizations in determining the eligible ITC:
- Due to multiple sources, data extraction for ITC is a challenge. For e.g., in the case of import of goods, the ITC data needs to be borrowed from the ICEGATE portal or bill of entry, whereas for ITC in respect of domestic purchases, ITC data has to be fetched from GSTR-2A/2B and purchase register.
- Often, data is entered into ERP by the accounts payable team. They are prone to errors because there is manual intervention involved. Therefore, instances of data accuracy and incompleteness are prevalent.
- The tax teams are required to spend significant time on reconciling ITC as per books vis-à-vis ITC as per GSTR-2A/2B and ITC claimed in GSTR 3B. This exercise is extremely time-consuming and tires the team. Consequently, the teams are unable to focus on the core functions of the business.
- As a fallout of the above, vendor follow-ups are required to ensure that minimum eligible credit is lost on account of vendor non-compliance.
- Even after the above, once data is uploaded on ASP/GSP solution, an entirely clean ITC report cannot be expected as it requires a certain level of manual intervention to reach a logical conclusion.
- The above factors result in decreased profitability as the salary costs and manpower expenses increase due to extensive time being spent by tax teams.
- Moreover, the GST input tax credit is blocked on account of non-reconciling items. Consequently, organizations face a working capital crunch.
However, technology is upgrading at a swift pace. Organizations can do the following to solve the above issues:
- Build a tax tech architecture with connected systems, comprehensive and outstanding reconciliation tools that help in developing advanced user access management, effective vendor coordination, and smarter accounts payable.
- Smart and integrated systems help in two-way ERP integration and digitization of purchases as well.
- Further, managed services also prove to be an effective solution for minimizing errors in ITC claims and help organizations in claiming correct and eligible ITC.
The above steps will improve vendor communication by automating purchases. This in turn will save the ITC that is lost due to miscommunication or negligence on the part of the vendors. It can also assist in making smarter vendor payments whereby payment to vendors can be blocked in case of an ITC mismatch.
Cygnet Infotech is pleased to offer its solution to the above problems – ‘ITC infinite’ which helps organizations in saving ITC lost due to specified reasons. It assists the organizations by offering support to create optimum tax tech architecture, integrate ERPs, and offer managed services.
The use of technology is the best answer to the issues that businesses are facing in terms of ITC claims. ITC Infinite can significantly save the time of tax teams and reclaim the ITC that is seemingly lost in the process.