Updates to the GST return format: Why would ITC changes complicate matters for taxpayers?

The implementation of the GST law in India has been prefaced by a narrative of national aspiration and global exceptionalism. The government has been working to simplify the whole GST framework for India Inc. by changing the reporting technique to make GST a “Good and Simple Tax,” so that only non-compliant assessors are questioned or held accountable, while diligent assesses are unaffected.

The administration just announced one such modification in the form of Notification No. 14/2022 – Central Tax, dated July 5, 2022, under Table 4 of GSTR 3B, about the Input Tax Credit (ITC). Since September 1, 2022, the aforementioned updates have been available on the GST portal. In summary, the government has significantly altered the following two aspects:
1. Mandatory reporting of reversals on account of ineligible ITC in Table 4(B)(1) that are permanent and are not reclaimable, such as blocked credits under section 17(5), reversals under Rules 42 & 43 on account of exempt supply, and so on.

2. Reporting of ITC reversals that are not permanent in Table 4(B)(2) and reclaiming the same in Table 4(A)(5), with detailed reporting of the stated information in Table 4(D)(1) as well [this is a new Table introduced today]. This will include ITC reversals due to non-payment to the vendor within 180 days, reversal of ITC shown in GSTR 2B but not accounted for in books, and so on.

The aforementioned two adjustments in reporting ITC reversals in line with GST requirements were previously necessary. However, the bulk of taxpayers did not expressly follow the adjustments, and only qualifying ITC or ITC accessible and ITC-reversed was reflected in GSTR 3B. Such adjustments would provide greater transparency in taxpayer reporting and will assist investigators in reconciling GSTR 3B statistics with the books for improved tax administration.

Also, the government has specific goals in mind when making these changes, such as (a) auto-populating and co-relate the information of GSTR 3B with GSTR 2B, and that of GSTR 9 with GSTR 3B; and (b) ensuring uniformity in the practice of reporting ineligible ITC as well as various reversals of ITC in GSTR 3B. However, this has increased the difficulty of submitting GSTR 3B, which was designed to be a summary return’ at the time of its inception.

Based on our interactions with many clients at various scales and our own experience aiding such clients in their routine compliance, we have identified the following issues as a result of these changes:
Non-accounting of ineligible ITC under section 17(5) separately in ERP –
In most firms, the accounting procedure for vendor invoices is designed in such a way that the GST amount, which is ineligible for ITC, is not recorded separately, but rather the full transaction amount is booked in the expenditure GL itself. As a result, extracting a report of invalid ITC booked within a period is challenging. Companies will have to reorganize the above mentioned process and have a distinct GL/report for ineligible ITC as a result of the latest modification, however, this will need a lot of adjustments in their ERP system(s) as well as in their AP process, which is both times consuming and costly.

True up/true down in reversals made under Rule 42 after the year –
Sub-rule (2) of Rule 42 provides for re-computation of ITC reversal on account of exempt supplies at year-end based on the turnover of the entire fiscal year and requires the taxpayer to either reverse the deficit ITC amount not reversed previously or avail the ITC amount reversed in excess in monthly returns. As a result, monthly reversals made under Rule 42 may not be considered absolute, and the taxpayer may be required to reclaim the same at a later point. However, it appears that the government has failed to recognize this provision and identify the method for implementing the necessary changes. This element should be clarified soon. Similarly, if there is an unintended error in reporting information in Table 4(B)(1), there is no formal process for correcting it.

Reconciliation of all GSTR 2B transactions, including invalid ITC –
According to the clarification published in Circular No. 170/02/2022-GST dated July 6, 2022, a taxpayer is obliged to disclose the information in Table 4(A) as auto-populated in GSTR 2B for the relevant month. This will include reconciling all of the GSTR 2B line items, including the ineligible ITC, with the relevant month’s purchase register. This will be necessary to present accurate information in Table 4(B) on ITC reversals and to ensure that the “Net ITC availed” amount in Table 4(C) reconciles with the ITC amount as reported in the books. There is little question that this will increase the expense of compliance on taxpayers, particularly businesses –

Inability to easily access data on ineligible ITCs from their ERP

Due to a restricted amount of data, they are using the manual method to reconcile their qualifying ITC with GSTR 2B; and

Having solely exempt supply (such as firms involved in the generation and sale of electricity) and are not entitled to any ITC, but because the numbers of ITC will still auto-populate from GSTR 2B, they must reconcile the same and assure reversals of the same.

Reversals [Table 4(B)] are not taken into account by the tax agency when issuing notices on ITC reconciliation –
Taxpayers are routinely receiving letters from the IRS regarding differences in the amount of ITC availed in GSTR 3B vs GSTR 2A/2B. The department does not include the number of reversals made by the taxpayer in Table 4(B), and the amount of GSTR 2A/2B evaluated is different from the amounts accessible on the GST site. As a result, there have been multiple cases where taxpayers have received ITC notices that have already been reversed in GSTR 3B of the same month. Given the changes, we anticipate a rise in the number of such faulty notifications received by taxpayers, therefore overburdening the taxpayer with more compliance-related labor.

While the government intends to reduce tax leakage and drive it digitally, they should also consider making the GST filing process more economical and user-friendly, rather than making it a complex and affluent process that would require robust technology and back-end support from trained professionals, as this inclination towards correlating myriad reporting requirements and auto-population of various categories of data segments has muddled the overall woe.

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