GST returns: How to prepare for new provisional credit rule; wrongful claim of ITC may attract penal provisions

On 9 October 2019, the Central Board of Indirect Taxes and Customs (CBIC) announced a rule regarding provisional ITC claims. If a supplier fails to upload invoices, the provisional ITC will be restricted to 20 percent for a buyer. Provisional input tax credit (ITC) refers to ITC which can be claimed even though ITC is not available in GSTR-2A. The provisional ITC will be calculated based on ITC available in a buyer’s GSTR-2A. If some invoices have not been uploaded, 20 percent of the ITC that belongs to invoices uploaded shall be allowed as provisional credit. Let’s understand this in more detail. What is the impact of this new rule? Any new rule which is announced in the middle of a tax year always proves to be a challenge for the taxpayers. Earlier, taxpayers could claim ITC based on their records while filing GSTR-3B. Now, due to the restriction of credit in case of failure of a supplier to upload will impact a taxpayer’s working capital. A buyer may have satisfied all conditions related to becoming eligible for ITC, but if a vendor fails to upload invoices, a buyer will not be allowed to claim ITC. He will need to regularly reconcile his books of accounts and communicate the mismatches to his vendors. [caption id=“attachment_4799391” align=“alignleft” width=“380”] Representational image. News18.[/caption] Apart from the 20 percent of eligible ITC which he can claim as provisional credit, the balance tax due will need to be paid in cash. This will affect the working capital of the buyer, as he will be required to make cash payments despite having paid for the invoice and becoming eligible for ITC. This rule will make sure full ITC is not available, where invoices are not uploaded and increase tax collections for the government. How to calculate the provisional credit on eligible ITC? A business can claim the ITC only if the credit relates to his business activities such as purchases made to effect output sales, capital assets purchased and services received to conduct business activities, etc. This constitutes eligible ITC. In addition, the auto-generated GSTR-2A return will also report ITC, which is ineligible by law, or unsuitable for not being related to business activities such as food/catering services, personal expenditure, etc. There may also be ITC that is mistakenly reported in the GSTR-2A due to a wrong GSTIN being entered by a supplier. A taxpayer can claim provisional credit only to the extent of 20 percent of the ‘eligible’ ITC available, and not the total ITC reported in the GSTR-2A. A wrongful claim of input credit could result in penal provisions being initiated on the taxpayer. How to prepare for this new rule? 1) A taxpayer needs a full understanding of invoices appearing in his/her GSTR-2A. This will help him or her to raise accurate ITC claims. Provisional ITC will be calculated based on the ITC claims eligible and appearing in GSTR-2A. 2) Since this rule will impact a company’s working capital directly, henceforth businesses will have to invest additional time to manage their accounts payables more efficiently. 3) It becomes vital for businesses to continuously follow-up with their suppliers so that they upload the missing invoices. 4) Taxpayers will need to regularly match their ITC with the details which are available in Form GSTR-2A before making ITC claims via their monthly GST returns. 5) The taxpayer may benefit from setting up a system of invoice tracking and a continuous communication link with every vendor/supplier. 6) Deploying a GST software comes handy too since it will be useful to identify the gaps between a taxpayer’s purchase books and GSTR-2A. 7) Some of the GST tools available online help in downloading GSTR-2A for several months in just a single click. 8) Taxpayers can also automate their communications with vendors by deployed system-generated reminders to suppliers. This announcement is crucial for all taxpayers. However, it’s a caution particularly to those taxpayers who procrastinate completing their GSTR-2A reconciliation on time or consider it as a year-end activity. (The writer is founder and CEO, ClearTax)