What is ITC?

The fundamental pillar of the GST regime is thought to be an input tax credit. Indeed, it is the provisions of ITC that essentially make GST a value-added tax, i.e., collecting tax at all points of the supply chain while allowing credit for previously paid tax. ITC is a tool that eliminates the possibility of tax cascading and shifts the burden of taxation to the end consumer.  

The CGST Act, 2017 defines Input Tax Credit under section 2(63) as the credit of input tax. It usually means that the registered person will receive a credit for the tax paid on purchase to set off when paying the tax to the government on sales of goods or services or both.

It is important to understand that section 155 requires a person who claims ITC to bear the burden of proving such a claim.
 

Why is ITC important?

Every stakeholder in a specific supply chain, from the manufacturer to the end consumer, should take advantage of ITC to offset the tax paid earlier with the tax paid later.

When can you avail of ITC?

For a person to be eligible for ITC under GST provisions, a person must meet some logical conditions, which are as follows:

  1. You should be registered under GST
  2. Goods/services to be used for business purposes (Section 16(1)
  3. You must have the Invoice (a tax-paying document containing the necessary information) on hand (section 16(2)(a))
  4. You must have received the goods/services for which you paid (section 16(2)(b))
  5. The tax must have been paid to the government by the vendor who collected it
  6. The vendor to whom you pay the tax should have filed the required returns i.e., GSTR 2B

It is important to note that, in addition to the conditions you must meet to claim ITC, the vendor with whom you have transacted must also meet his set of requirements for you to claim ITC. While it makes it easier for the government to supervise because the latter person will keep the previous person in the supply chain on track because everyone’s benefits are dependent on one another, it adds a lot of communication and friction to the entire process of reconciling and claiming ITC.

What if you don’t use ITC?

Many GST provisions can be used by a registered person to manage ITC. It is advised to claim ITC and use it to help with the difficulties of the GST ITC chain, but this is not the only option. If a registered person does not claim the due ITC, the below-mentioned steps can also be taken:

  • Carry Forward: If the registered person is unable to use the ITC in the month it is due, it can be carried forward to the next month or any subsequent period.
  • Refund of ITC: The registered person may claim a refund of ITC under the provisions of Section 54 of the CGST Act, 2017.
  • ITC Lapse: ITC must be claimed within one year of the invoice date. After the expiry of the said period ITC lapses and goes in favor of the Government fund, and the individual no longer has access to ITC.

Time Limit to Avail ITC

The time limit for claiming ITC is before submitting valid GST returns for the month of September following the financial year end applicable to that invoice. The GSTR-3B return of September is to be filed before 20th of October.

What if you wrongly avail ITC?

One of the main reasons for incorrectly claiming ITC is an inaccurate reconciliation of ITC, which results in a lower or higher claim of ITC. As can be seen, ITC plays an essential role in the GST process, and claiming ITC incorrectly can have severe consequences like

  • Reversal of incorrectly claimed ITC
  • Levy of interest at a rate of 24%
  • Demand & Recovery of ITC reversal amount and interest u/s 73 & 74
  • A penalty equal to the amount of ITC incorrectly claimed u/s 122
  • Prosecution and incarceration u/s 132

What role does GSTR-2A/2B play in ITC Reconciliation?  

Reconciliation refers to the process of matching GSTR-2A and GSTR 2B forms (auto-populated from various suppliers’ GSTR-1, GSTR-5, and GSTR-6) with Books of Accounts.  This process will identify inconsistencies in both data sets via mismatches in the reconciliation.

Suppliers may fail to include invoices for sales to recipients in their GSTR-1 for various reasons (sales return). The transaction record does not appear in the recipient’s GSTR-2A/ GSTR 2B purchase return when this happens. Furthermore, unless the invoice record of the purchase is included in GSTR-2B, the recipient will be unable to claim Input Tax Credit on such transactions.

Difference Between GSTR-2A & GSTR-2B

The two statements are vital and mandatory for the ITC reconciliation process, but it seems that the industry faces confusion regarding the full understanding of GSTR-2A & GSTR 2B. Where the statement has similar purchase centric data the following differences between the two:

Procedure to Reconcile GSTR-2A/GSTR -2B Data with ITC Register (The Manual Way)

Step 1) Keep track of invoice statuses as “Submitted” or “Not Submitted.”

Step 3) Determine the reasons for any ITC register entries that do not match GSTR-2A/2B

Step 4) Use GSTR-2A /2B to correct the mismatched entries in the ITC register caused by your error.

Step 5) Identify the entries that do not match due to vendor error.

Step 6) To understand the status, divide the entries into mismatched, unmatched, or entries with a few particulars missing.

Step 7) Determine how to contact such vendors to communicate the error.

Step 8) Communicate with the vendor about the mismatched and unmatched entries in GSTR-2A /2B caused by vendor error.

Step 9) Locate and claim any unused ITC in GSTR-2A /2B.

Step 10) Taking necessary actions such as retaining email trial, issuing debit notes, or delaying payment until the vendor corrects all incorrect entries.

Procedure to Reconcile GSTR-2A /2B Data with ITC Register (The Finsights Way)

Step 1) Login into finsights.biz

  • If you use Finsights Tally, the same credentials will work for the ITC reconciliation account.
  • If you are new to the platform, you must create an account.

Step 2) Authenticate Your GSTN

  • The authentication will allow Finsights to fetch GSTR-2A /2B details and integrate them automatically with its interface. (updating the data every 24 hours)

Step 3) Import your Purchase Register

  • If you are a Finsights Tally user, your records have been automatically configured with GST data
  • If you use any other platform for maintaining your Books, you can import the data by uploading a CSV file.

Step 4) Automation Process

  • In this step, all the data will be automatically arranged systematically, with all the entries’ real-time status divided into
    • Matched
    • Mismatched
    • Probable Match
    • Missing in GSTR-2A/2B
    • Missing in Books
  • The data is filtered to analyze the reconciliation situation quickly and straightforwardly. All vital information such as the supplier’s name, GSTN, address, contact information, and so on, and the tax amount segregation and status are displayed in tables and charts to make everything simple to understand.

Step 5) Communicate with Suppliers

  • Finsights provide several options for locating and communicating the supplier’s error, including the ‘supplier’s summary’ report and the ‘Mail’ and ‘Bulk Mail’ features, which allow you to communicate with the supplier more quickly.

The Finishing Line (Take-aways)

Compliance with GST ITC reconciliation is critical, and as previously stated, when the process is performed and results are obtained manually, it takes a significant amount of time. Obtaining data, organising and labelling each entry according to their status, deciding on the steps to be taken, locating the supplier and the supplier’s contact information, and finally coordinating with the supplier by communicating the corrections to be made is a time-consuming and tedious process.

Finsights not only automates the entire reconciliation process, cutting the number of steps required in half, but also makes data segregation and compliance accurate, quick, and understandable.

To avoid penalties due to the inherent complexities of ITC reconciliation and to make your time-consuming monthly task of managing ITC reconciliation to GSTR-2A /2B simple, a dive into the handy interface of Finsights is highly recommended.

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Finsights GST ITC Reconciliation automates the reconciliation process of GSTR 2A and 2B. Now you can save both time and money by managing Input Tax Credit on Finsights. Finsights also offers Free Tally on Mobile solution for Modern Entrepreneurs.

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