GST INPUT TAX CREDIT (ITC) RECONCILIATION GUIDE

5 BASIC CONDITIONS FOR AVAILING INPUT TAX CREDIT

The input tax credit under Goods and Service Tax can be availed after satisfying
following conditions.
1. Goods or services received must be for furtherance of business
2. Tax Invoice, Debit Note, Bill of Entry should be available
3. Goods or services must be received
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4. Tax charged on the invoice should be paid by vendor

5. Vendor must have filed its returns

Compliance of conditions numberv 1 to 3 is under the control of the person claiming

the ITC but conditions number 4 and 5 are dependent on external factors where
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the taxpayer needs to track the compliance status of his vendors for finalisation of
his own claim of ITC.

WHAT HAPPENS WHEN ABOVE CONDITIONS ARE NOT SATISFIED?

Now the burning question is what will happen when the taxpayer fails to satisfy
any of the above conditions?

 Your claim of ITC becomes incorrect and invalid.

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 Reversal of wrongly claimed ITC and levy of interest @ 24%

 Demand of Tax and interest by government on reversal.
 Levy of penalty equal to amount of ITC wrongly claimed.
 Prosecution and imprisonment.
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 WHY THIS RECONCILIATION IS IMPORTANT?

The ITC Reconciliation is an important activity to do due to following reasons.

 To ensure that the ITC is correctly claimed by the company.

 To avoid risk of reversal of ITC, levy of interest and penalty by government.
 To protect the bottom line of the company.
 To check the misuse of GSTIN of the company.

WHY ITC RECONCILIATION IS A TIMELY EXERCISE TO DO?

ITC reconciliation is a timely exercise due to following reasons.

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 Matching of ITC is mandatory condition under GST.

 Government can scrutinize the GST returns upto 6 years.
 If reconciliation not done, company is carrying major risk for 6 years.
 With interest @24% the ivnterest cost may be high than basic tax.
 In case of delay, recovery from defaulting vendor is difficult.
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 Detection of misuse of your GSTIN is possible by regular reconciliation.

HOW ENTRIES IN GSTR-2A CAN BE A REASON FOR TAX DEMANDS?

GSTR-2A is not only the tax credit report but also a tax demand report.

 RCM invoices of GST registered vendors show up in GSTR-2A.

 If RCM invoices not reconciled with own books, government can raise
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demand of tax under RCM.

 If demand is raised under audit, the ITC cannot be availed after deposit of
such demand.
 Purchase invoices can also show up in GSTR-2A which may not have been
entered in the books. This can also result in demand of tax.
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 8 STEP PROCESS OF RECONCILIATION AND TRACKING VENDOR COMPLIANCE

To reconcile the 2A with own ITC register following process is required.

 Monthly matching exercise with 2A & ITC Register.

 Track invoice status showing as “Submitted” or “Not Submitted”.
 Track the status of filing of GSTR-3B by vendor.
 Find out any entries in ITC register unmatched with 2A and reasons thereof.
 Rectify the mismatching entries in ITC register with 2A due to own error.
 Identify and follow up the mismatching entries in 2A due to vendor error.
 Identify and avail unclaimed ITC appearing in 2A.
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 Identify and follow up the unmatched entries in ITC register with defaulting
vendors to make necessary corrections.
 Taking steps like issue of debit notes or withholding of payment of vendors
till resolution of ITC issues.
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TOP REASONS OF MISMATCHED, UNMATCHED AND UNCLAIMED ITC IN 2A

 Wrong data input by own team

 Wrong data input by vendor team
 Debit notes and credit note issues
 Vendor issued tax invoice but not filed the GST Return
 Vendor issued tax invoice in a month but ITC is claimed in another month.
 Vendor amends the tax invoice issued earlier
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 Vendor issues debit note or credit note on a particular invoice which is not
entered into the system.
 Place of supply mismatches
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 CHALLENGES IN RECONCILIATION PROCESS

 Non availability of system to track ITC and 2A data simultaneously

 Time consuming process
 Lack of collaboration between team members
 Usage of complex excel formulas and maintaining multiple excel files across
the organization.
 Frequent changes in accounting and finance team.
 Handling of updates and amendments in 2A.
 Identification and resolution with defaulting vendors.
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NEED HELP IN YOUR ITC RECONCILIATION?

Call us : 9829948999, 9829841999

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Email us : info@digitaxindia.com
Visit us : www.digitaxindia.com
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