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Section 16(2) (aa): Fasten Your Compliance Belts, Businesses May Feel Some Bumps Ahead.

Section 16(2) of the CGST Act, 2017 specifies the conditions that a registered person must meet to claim ITC. A taxpayer is only eligible to claim ITC if he has an invoice or tax-paying document relating to such a transaction in his possession, according to section 16(2)(a) read with rule 36.

Furthermore, the normal chain of procedures requires vendors to include such invoices in their GSTR-1 to be auto-populated in the taxpayer’s GSTR-2A (as per section 38); once included in the GSTR-2A, the ITC is eligible to be claimed.

Interestingly, rule 36(4) governed the concept of provisional ITC, which allowed the registered person to claim a certain percentage of total eligible ITC based on invoices that were not uploaded by the vendor in his GSTR-1 (the last rate before the recent amendment was 105 %)

The mandatory implementation of section 16(2) (aa) has taken effect from January 1, 2022. According to the section, a registered recipient CAN ONLY TAKE ITC IF the vendor has uploaded such an invoice in his GSTR-1 and the same is communicated through GSTR 2B. This section has amended rule 36(4) to state that provisional ITC will no longer be allowed on non-uploaded invoices. Every invoice (only if uploaded) qualifies for ITC.

GSTR-2A and GSTR-2B are the two auto-generated returns related to this amendment. Where GSTR-2A is a dynamic return that updates in real-time as the vendor updates his GSTR-1. GSTR-2B, on the other hand, is a static auto-populated return that is generated after the vendor files his GSTR-1. Both returns are currently described as the mode of communication, i.e., reconciling ITC data with 2A and 2B is required before claiming ITC for that particular month.

Intention Behind the Amendment

  • The CBIC introduced the amendment with the aim of revenue augmentation and not trade facilitation.
  • The amendment regulates the compliance of each and every invoice that enters the GST chain.
  • Previously, taxpayers would wait until the due date for filing returns before communicating any changes regarding missing or mismatched invoices to the vendor. If the correction was made, that’s great, but if it wasn’t, then provisional ITC (5%) was claimed, which led taxpayers to take such provisions for granted.
  • After the amendment, provisional ITC is no longer available, and communication between the vendor and the recipient must be continuous and channelized through GSTR 2B to claim ITC.
  • It also directs recipients of goods or services to supervise and maintain constant contact with defaulting or non-compliant vendors, as such vendors affect their ITC claims.

Some Consequences of the Amendment

  • This amendment is likely to have an impact on the majority of entities.
  • The recipient of goods or services must fulfill a new set of responsibilities to obtain ITC, which is time-consuming and inconvenient.
  • To compel and ensure that the vendor complies with his share of provisions, a constant communication channel must be maintained between the vendor and the recipient.
  • Any additional ITC claims and failure to comply with this new condition will result in penalties or the suspension of the recipient company’s GSTIN.
  • Businesses that do not act quickly risk having incorrect ITC claims, which will harm their cash flow and working capital.

What can be done?

It is obvious that to obtain ITC, one must concentrate on

  1. Communication with the vendor
  2. Check to see if he is filing his returns correctly.
  3. Accurately reconcile ITC data with GSTR-2A and 2B.

Even though many businesses recognize the importance of frequent reconciliation, they continue to rely on the 5% extra ITC every tax period. Now that the provisional ITC benefit is no longer available, ITC reconciliations must become dynamic, real-time, and per payment cycle. However, reconciliation becomes a laborious task when it is done manually through excel sheets making it difficult to track non-compliant Vendors.

The manual route is visible as difficult, exhausting, and time-consuming. Recipients will also face new challenges that will require technological intervention to address. This is where Finsights  comes in, a platform that automates the entire process of reconciling ITC data with GSTR-2A/2B, from fetching data from books to segregating the data into different status groups of matched, mismatched, probable match, missing in GSTR-2A/2B or missing in books, providing indicators to take the appropriate action, and providing supplier details until the stage of communicating with the supplier through Mail and Bulk Mail feature of the platform itself. Finsights provides a real-time ITC tracker which recommends How much ITC can be claimed in GSTR 3B. To make your ITC compliance process easy, simple, and accurate, Visit Now!


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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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