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Reversal of GST Input Tax Credit (ITC)
GST, a comprehensive indirect tax system introduced on 1st July, 2017, is a transaction-based, technology-driven tax system. Under GST, compliance becomes a key factor for the success and credibility of businesses. GST compliance works on the concept of Self-Monitoring mechanism, under which the input tax credit will be dependent on your supplier’s compliance. This means, your supplier should file the returns, declaring the outward supplies along with the tax payment, and matching of invoice between supplier and recipient of goods and services.
This is a major transformation from the earlier compliance process, in which the value of input credit availed by you is not dependent on your suppliers’ compliance.
In this blog, we will discuss the reversal of GST input tax credit (ITC), which is provisionally credited to your e-credit ledger based on Form GSTR-2.
Under GST, if your supplier fails to furnish the valid returns (furnishing returns along with payment of tax), or the details of inward supplies are not declared (Form GSTR-1) and accepted (Form GSTR-1A) by your supplier as outward supplies, the input tax credit claimed by you will be reversed and you will be asked to discharge it along with the interest.
Let us understand the mechanism and timeline for reversal of input tax credit:
• Communication of final eligible credit (matched credit) and discrepancies (mismatched credit).
• Timeline to ratify the discrepancies due to mismatch.
• Reversal of ITC, in case ratification is not done within the time period.
Communication of final eligible credit (matched credit) and discrepancies (mismatched credit)
The final acceptance of input tax credit and discrepancies will be communicated in Form GST MIS-1 to the recipient and in Form GST MIS-2 to the Supplier.
|Form GST MIS-1||Recipient|
|Form GST MIS-2||Supplier|
Let us understand this with an example:
The following is the inward and outward supplies of Super Cars Ltd. for the month of July
|Inwards Supplies||Outward Supplies|
|Invoice No||Supplier Name||GST||Bill||Customer||GST|
|6||Ratna Steels||5000||1||Vishnu Motors||25,000|
|10||Ratna Steels||10,000||2||Ravindra Automobiles||6,000|
The following are the details of returns filed by Super Cars Ltd. And Ratna Steels for the month of July.
|10th August||Ratna Steels||Form GSTR-1||Ratna Steels uploads the outward supplies made to Super Cars Ltd. Invoice no.10 is not uploaded.|
|Super Cars Ltd.||Super Cars uploads the outward supplies made to Vishnu Motors and Ravindra Automobiles.|
|11th August||Super Cars Ltd.||Form GSTR-2A||The auto-populated statement of inward supplies based on Ratna Steels’ Form GSTR-1 is sent to Super Cars Ltd.|
|15th August||Super Cars Ltd.||Form GSTR-2||Super Cars Ltd adds missing invoice no. 10 in Form GSTR-2 and submits thereturns. Based on Form GSTR-2, ITC of Rs. 15,000 will be credited to e-credit ledger of Super Cars Ltd. On provisional basis.|
|17th August||Ratna Steels||Form GST-1A||The details of invoice no. 10 added by Super Cars Ltd. received in Form GSTR-1A is rejected/ not accepted by Ratna Steels.|
|20th August||Ratna Steels||Form GSTR-3||The auto-populated monthly returns is submitted along with the payment of tax by Ratna Steels. Since invoice no. 10 is not uploaded and accepted, the payment of tax will only be towards the first outward supplies, that is, Rs. 5,000.|
|Super Cars Ltd.||Even though invoice no. 10 is not uploaded and accepted by Ratna Steels, Super Cars Ltd. Will be allowed to the claim the complete ITC of 15,000 on provisional basis. Hence, the tax liability of Super Cars Ltd. in Form GSTR-3 will be after considering the complete ITC of Rs. 15,000.|
As explained in the above table, monthly return Form GSTR-3 of Super Cars Ltd. auto-populated by GSTN will consider the provisional ITC in determining the tax liability. As a result, the tax liability of Super Cars Ltd. Will be Rs. 16,000.
|Monthly Return of Super Cars Ltd. as on 20th August|
|Tax liability on outward supplies (25,000+6,000)||31,000|
|ITC on inward supplies||15,000*|
|Tax liability (After Set-off )||16,000*|
*credited on provisional basis
After the due date of return filing of July, that is, 20th August, the matching of invoices will be done to determine the final ITC eligibility for Super Cars Ltd. Since Ratna Steels did not upload and accept (Form GSTR-1A) invoice no. 10, during the matching of invoices, this bill was not matched. As a result, ITC of Rs. 10,000 will be mismatched and the communication about mismatch along with final eligibility (matched credit) will be made available to Super Cars Ltd. in Form GST MIS-1, in the month of August.
|Form MIS-1 after filing returns of July by 20th August|
|Finally Accepted ITC||5,000|
|Mismatch of ITC||10,000|
Timeline to ratify discrepancies due to mismatch
The discrepancies arsing due to mismatch of input tax credit available in Form GST MIS-2 needs to be ratified by the supplier. The supplier needs to furnish the ratified details of outward supplies for the month in which the mismatch report is made available. For example, Form GST MIS-2 is made available in the month August. The ratified details of outward supplies needs to be furnished in Form GSTR-1 for August, to be filed by 10th September, and the monthly return by 20th September.
|Date of MIS-2 Received||Form in which the ratified details needs to be furnished||Date to furnish the ratified details in returns||Monthly return||Payment|
|August||Form GSTR-1||10th September||20th September||20th September|
In the above example, the mismatch of Rs. 10,000 is reported for the invoice no. 10 in the month of August, to both Super Cars Ltd. and Ratna Steels. This discrepancy needs to be ratified by Ratna Steels before filing the Form GSTR-1 for the month of August, due by 10th of September. If it is ratified and details are furnished within the time period as discussed above, the input tax credit of Super Cars Ltd. will not reversed.
Reversal of ITC, in case ratification is not done within the time period
If the mismatch communicated is not ratified within the time period specified, the amount of discrepancy (which was provisionally credited), will be added as output tax liability to the recipient. The recipient is also liable to pay the interest on such amount at the rate not exceeding 24% from the date of availing the input tax credit till the date of payment.
If the discrepancy communicated in the month of August, is not ratified and reported by Ratna Steels on or before 10th September, the input tax credit of Rs. 10,000 (invoice no. 10) will be added as output tax liability for Super Cars Ltd. This will happen in the month of September, and the returns are to be filed by 20th October. Along with the output tax liability, Super Cars Ltd. would also be liable to pay interest, a maximum of 24 % from the date of availing ITC till the date of payment.
If the mismatch or discrepancy is due to excess claim of input tax credit, on account of duplication of claims will also be reported in Form GST MIS-1. This will be added to the output tax liability of the recipient for the month in which the duplication is communicated along with the interest.
For example, excess claim is made for the month of July, filed by August and discrepancy is communicated in Form GST MIS-1 in August. The output tax liability will be added for the month of August return to be filed by 20th September along with the interest.
Technology will play an important role for timely compliance and to avoid reversal of input claim. The GST software you use, will play a key role in automation of reconciliation and matching of invoices. It will also assist you in quick correction of errors, or omission through system generated exceptional reports.
Your timely cash-flow and management will dependent on your vendor’s compliance discipline. Ensure that your vendors are educated on the importance of being GST complaint. Also, reviewing your vendor’s compliance history, and so on, will help you to be better prepared and safeguard your input tax credit.
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