FY 2019-20: GST Compliance - Action Points

We are all aware that COVID 19 pandemic has a great impact on the economy and non-compliance under any tax law due to cash flow has led to the payment of interest, late fee, and penalty. Generally, September is the compliance month for tax laws such as Income tax or GST law (previous financial year compliance).

Study of GST trend from inception, relaxation for rectification of errors, or omission only for FY 2017-18 transaction up to due date of furnishing GSTR 1 of March 2019. However, for FY 2018-19 only due date of filing GSTR 3B was extended up to 25^th October 2019.

Government has taken various steps to support taxpayers in pandemic by extending due dates or reduction in interest and late fees. There is an expectation for an extension for reporting transactions of FY 19-20 in returns.

To avoid a last-minute hassle in being complaint (whether the extension has been made or not), an effort has been made in this article in two series to list down the following

1. Key consideration to comply within the timelines for FY 2019-20
2. Procedures to be followed for the compliance of above-mentioned consideration and
3. Practical challenges/caution to comply with the above-mentioned provisions.

1. Key consideration to comply within the timelines for FY 2019-20.

Timelines for various compliances for transactions of FY 19-20 are up to the due date of GSTR 3B of September 2020 (i.e. 20^th October 2020 unless extended) or furnishing of the annual return of FY 2019-20, whichever is earlier (except if any specifically mentioned). As we come close to such a due date, it is important to revisit and validate certain critical aspects of accounting and compliance in GST laws. Following is the list of considerations for which detailed discussion has been made further.

1. Rectification in GSTR 1/ GSTR 3B
2. Disclosure of credit note
3. Availment of ITC
4. Annual re-computation of Rule 42 Reversal
5. Applicability of Rule 36(4)
6. Amnesty Scheme for filing return of FY 2019-20
7. Filing of various other returns
8. Interest on delayed payment of taxes
1. Disclosure of ineligible ITC
10. Closure of accounts

A detailed discussion is followed:

1. Rectification in GSTR 1/ GSTR 3B - Rectification of error or omission in respect of the details furnished in GSTR 3B shall be made in not later than an above-specified date – as per Section 39(9) of CGST Act 2017. However, any rectification of error or omission in respect of the details furnished in GSTR 1 shall be made before filing GSTR 3B of the September 2020 - as per Section 37(3) of the CGST Act 2017.

In case of taxes, not discharged/short discharged through GSTR 3B within the time of supply applicable then interest would be an additional cost.

Circular 26/2017 dated 29.12.2017 clarified the procedure for rectification of errors as follows:

Circular 13/2020 dated 13.04.2020 clarified the adjustment of advances received for supply of service which subsequently got canceled as follows:

However, 2^nd point states claiming a refund for in case only receipt voucher has been issued due to option not available in the common portal shall be a cumbersome process. 

2. Disclosure of credit note – Credit note in relation to supply made in FY 2019-20 shall be issued by September and declared the latest by the above-mentioned date. Adjustment in tax liability shall be made by the supplier only if the recipient reduces its ITC - Section 34(2) of the CGST Act 2017.

Analysis: This could be understood with an example as follows:

In the third example, differences in accounting and return would exist as taxes would not be adjusted in return but accounted as expenses. Where the time has lapsed than ensure financial credit note (without tax implication) could be issued which is not required to be disclosed in returns as clarified in Circular 72/46/2018 GST dated 26-10-2018.

3. Availment of ITC - ITC could be availed in respect of invoices issued in FY 2019-20 or debit note (DN) relating to invoices issued in FY 2019-20 within the date specified above – Section 16(4) of CGST Act 2017.

Analysis –

1. ITC on invoices - ITC in respect of invoices dated in FY 19-20 could be availed within the due date of GSTR 3B for September 2020.
2. ITC on debit notes – Timeline for issuance and disclosure in returns of debit note by the supplier as provided for credit note is not available. However, the timeline has been provided for the availment of ITC in respect of debit notes relating to invoices of FY 19-20 within the date specified above. Hence to maintain a healthy relationship with the customer, it would be beneficial to issue a debit note within such a due date.

Amendment vide Finance Act 2020 – Timeline for availment of ITC pertaining to debit notes has been extended to the due date of furnishing September following the end of the financial year to which such debit note pertains or furnishing of annual return whichever is earlier. However, this amendment would be applicable once the notification relating to such provision would be issued.

  This could be understood with an example as follows:

3. ITC on a Self invoice – Taxpayer liable to pay tax under RCM shall issue self-invoice in respect of receipt of goods or service or both from an unregistered supplier and could avail the eligible credit based on such invoice and subject to payment of tax as provided under Section 31(1)(f) read with Rule 36(1).

Timeline for issuance of invoice and debit note under forward charge has been provided in Section 31 however the same has been not provided for the issuance of self-invoice. Based on the date of self-invoice, the timeline provided above for the availment of credit could be determined. This is to say that there is a loophole in the provision of law which ensures for availment of credit for supplies received from the unregistered person liable to RCM is linked to when the self-invoice is raised, rather than when the self-invoice should have been raised.

Following is the example for understanding of the timeline for the availment of RCM credit. Let us take an example that the legal service provided by the advocate has been availed by the recipient on 13.03.2020.

4. Annual re-computation of Rule 42 Reversal

The ITC in respect of inputs and input services being partially used for

1. 1. the purpose of business and partially for other purposes
   2. affecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies (excluding Schedule III activities of CGST Act 2017)

then proportionate ITC of other than business and taxable supplies including zero-rated supplies shall be reversed according to Rule 42.

Such reversal shall be recomputed finally for the financial year before the above-mentioned date and in case

1. the final amount exceeds the aggregate of the amounts determined earlier shall be reversed in GSTR 3B or through DRC 03 along with interest starting from 1^st of April of next FY till the date of payment.
2. the aggregate of the amounts determined earlier exceeds the aggregate of the amounts calculated finally shall be claimed as ITC.

Exception of the timeline has been provided to the construction industry that such computation shall before the due date for furnishing of the return for September following the end of the financial year in which the completion certificate is issued or the first occupation takes place of the project.

Analysis – Rule 42 reversal shall be required on a tax period basis and yearly (except for the construction industry). It suggested to recompute and take action as soon as possible to avoid incremental interest cost.

This could be understood with an example as follows:

5. Applicability of Rule 36(4)

Rule 36(4) has been inserted w.e.f. October 2019 providing restriction on availment of ITC up to ITC on invoices and debit note available in GSTR 2A plus 10% of eligible credit details available in GSTR 2A (except RCM (unregistered). Import of goods and services could be availed without restriction). For the period October to December 2019 the ad-hoc credit which could be claimed was 20%.

However, an extension has been provided for compliance of provisions of Rule 36(4) while claiming ITC in GSTR-3B for February to August 2020 due to the impact of COVID 19 but cumulative adjustment shall be made in  GSTR-3B for September 2020. Practically challenges and way outs are discussed ahead.

6. Amnesty Scheme for filing return of FY 2019-20

Amnesty scheme has been bought the second time for the taxpayers to comply with GST law considering this pandemic situation such that late fee has been reduced drastically. Relaxation has been provided for taxpayers who have failed to file GSTR 3B of the period July 2017 to January 2020 as follows –

1. 1. In case of NIL tax liability (i.e. CGST, SGST, IGST, or cess payable for a period is NIL) – NIL Late fee.
   2. In any other case – Late fee above Rs 500 has been waived off

However, returns should be furnished between the period from 01^st July 2020 to 30^th September 2020 to avail of the above relief.

Taking into consideration compliance of FY 19-20 only, the amnesty scheme has covered April 2019 to January 2020. However, interest would be applicable from the due date of the respective month till the date of filing of return. Further relaxation for late fees and interest for February and March 2020 based on turnover and States has been provided.

7. Filing of various other returns

Because of the spread of pandemic COVID-19 across many countries of the world including India, the due date of various other compliance of FY 2019-20 extended which falls during the period from the 20^th March 2020 to the 30^th August 2020 and where completion or compliance of such action has not been made within such time limit, shall be extended up to the 31^st August 2020.

Various other compliance shall be

1. GSTR 4 – Return for every financial year for composition dealers
2. GSTR 6 – Return of Input Service Distributor
3. GSTR 7 – Return of Tax Deducted at Source furnished by the Deductor
4. GSTR 8 - Return of Tax Collected at Source furnished by the e-commerce operator
5. ITC 04 - Details of goods/capital goods sent to a job worker and received back

8. Interest on delayed payment of taxes

ITC to be revered for ineligible credit availed or credit reversed lesser during the monthly computation under Rule 42 and credit to be reversed for February to August 2020 if invoice not available in GSTR 2A in September 2020 as per Rule 36(4). However, ITC availed but not utilized against any output tax liability, then the taxpayer may not be liable to pay interest for the reversal of ITC.

The same view was held in the case of Swift Laboratories Ltd. Vs Union of India [2009-240-ELT-328 (P&H)] and CCE vs. Maruti Udyog Ltd. [2007 (214) ELT 173 (P&H)] under earlier regime and Patna High Court's decision in case of. Commercial Steel Engineering vs the State of Bihar TS-553-HC-2019(PAT)-NT under GST. A similar amendment has been proposed to be made effective retrospectively from 01.07.2017 in the recently held 39th GST Council Meeting. However, it could be disputed by the department.

1. Disclosure of ineligible ITC

State of Maharashtra (Trade Circular No 47T 2019) and State of Kerala (Trade Circular No 6/2020) have issued circular stating taxpayers who have committed errors of wrong reporting or not reporting ineligible ITC in table 4D(2), as well as the reversal of ITC in the GSTR 3B for FY 2019-20, shall be disclosed in April 2020 to September 2020. In case of default, it may result in the selection of cases for scrutiny. Such circular may be issued in other states also mandating the requirement. To avoid such circumstances, accounting of ineligible ITC would result in appropriate disclosure in returns.

10. Closure of accounts

Accounting entries have to be passed to close all the ledgers relating to GST. This would be ensuring all reconciliation would be made and would be beneficial to arrive at figures required for annual return and audit.

2. Procedures to be followed for the compliance of above-mentioned consideration

This would ensure there is no misreporting made or missed out liability to be disclosed/paid or ITC to be availed.

1. Revenue:
   1. Reconciliation of outward Supplies as per books and disclosed GST returns (Books vs GSTR 1 vs GSTR 3B) at PAN level and GSTIN level.
   2. Reconciliation of e-way Bill report and Outward supplies as per books of accounts and returns
   3. Reconciliation of closing Inventory recorded in books and Year-end physical inventory report to identify if any taxes supply has been made or ITC reversal
   4. Reconciliation of Zero-rated supplies declared in GSTR 1 and GSTR 3B to ensure a smooth flow of refund.
   5. Verification of supply of goods or services to own branches/units/employees without consideration treated as supply liable for GST in terms of schedule I to CGST Act 2017.
   6. Finalization of cost allocation to branches and cross charge of expenses before finalization of annual accounts of FY 19-20 and disclosure in returns,
   7. Tracking of goods sent on approval basis to ascertain the time of supply for payment of GST.
   8. Verification of advance received for supply of services to ensure tax has been discharged and advance adjustment has been made.
   1. Verification of transaction reported as B2CS which is B2B transaction.
   10. Download of GSTR 1 invoice level and verification of correct disclosure as per books of accounts which will ensure credit availability to the recipient.

2. Input tax credit
   1. Verification of conditions of Section 16(2) for availment of ITC such as possession of a document, receipt of goods and services, payment of tax to the government, filing of return by the vendor, and consideration has been within 180days.
   2. Reconciliation of ITC as per books of accounts vs availed in GSTR 3B vs documents to ensure availment of eligible credit availed in the correct state.
   3. Review expense ledgers and map the same with the input tax credit ledger as per GSTR-3B workings, to identify if any ineligible credits have not been availed.
   4. Review of final computation of Input Tax Credits under Rule 42 and Rule 43 based on annual turnover so that the differential credits.
   5. Verification of fixed asset register to ensure depreciation has not to be claimed on the ITC amount. In case depreciation claimed ITC to be reversed.
   6. Perform year to date (YTD) GSTR-2A analysis every month to ensure all ITC is considered. Ideally to be performed quarterly, if not before the time limit of ITC claim for respective FY.
   7. Ensure ITC has been availed as per Rule 36(4) for invoices dated from 09th October 2019 [GSTR-2A + 20% or 10%] and check GSTR-2A for the previous months for the subsequent updating of invoices by the vendor, if any, and availed such ITC in the present month.
   8. Verification of ITC availed for February to August 2020 available in GSTR 2A. in case not available then ITC to be reversed.
   1. Reconciliation of electronic cash ledgers and electronic credit ledgers with books of accounts.
   10. Sending confirmation letter to vendors asking confirmation of disclosure of invoice details in returns.
   11. Verification of vendor compliance to ensure invoice issued appropriately and disclosed appropriately in GSTR 2A.
   50. Verification of availment of ITC only to the extent of receipt of goods as on 31.03.2020 and appropriately accounted in FY 19-20.
   1000. Identification of ineligible credits in the organization to ensure appropriate disclosure in Table 4(D)(2) in GSTR 3B.
   14. Vendor analysis and categorization – amend payment terms for semi/non - compliant and unorganized sector – Tax payment after GSTR 2A reflection only.

3. Reverse charge Mechanism (RCM)
   1. Identification of expenses liable to RCM and transactions reported in GSTR 3B.
   2. Verification of Form 15CA and Form 15CB (required by a person making the remittance (a payment) to a Non-Resident or a Foreign Company), identification of import of services liable under RCM and an additional amount of payment of tax under RCM.
   3. Verification of following main RCM transaction specifically made liable in FY 19-20 such that interest liability would not be added to the cost
      1. Services provided by way of renting of a motor vehicle provided to a body corporate.
      2. Services of lending of securities under Securities Lending Scheme, 1997 (“Scheme”) of Securities and Exchange Board of India (“SEBI”).
      3. Supply of services by an author by way of transfer or permitting the use or enjoyment of a copyright relating to original literary works to a publisher.
      4. Supply of services by a music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright
         relating to original dramatic, musical or artistic works to a
         the music company, producer, or the like.

Reconciliation of tax paid under RCM and availment of credit under RCM except for restriction under Section 17(5).

3. Practical challenges/caution to comply with the above-mentioned provisions
   1. Restriction of amendment in GSTR 1: It has been restricted to one time by the common portal however such restriction has not been provided in the law.  In such a case, the supplier has to be very cautious for amending the same as the recipient would not be able to claim ITC in case not available in GSTR 2A of the recipient.
   2. Correlation of credit note with single invoice: Section 34(1) has been amended vide Finance Act 2019 stating one to one correlation of credit note and invoice is not required. However, the GST portal restricts disclosing credit notes issued for more than a single invoice in GSTR 1. Presently credit note can be linked to a single invoice if invoice value is more than credit note and for other cases, suggest to issue more than one credit note.
   3. Adjustment of Credit note: The government portal does not allow to disclose negative values in GSTR 3B in case there were no sufficient outward supplies till September of the next financial year to adjust the taxes on credit notes. The only option would be to claim a refund under “others” head of such amount as provided in Circular 26/2017 – CGST. However, claiming a refund would not be an easy task.
   4. ITC on Debit Note: Clarity is awaited for entitlement of ITC in respect of debit note issued after notification has been issued (delink of debit note with the invoices for availment of ITC) of FY 2017-18 or FY 2018-19 also. Presently there has been no restriction provided in the Finance Act 2020 for such availment however clarity is expected in the notification to be issued.
   5. Compliance of Rule 36(4):
      1. Extension of Rule 36(4) for the period February to August 2020 has led to non-availment of credit of October 2019 to January 2020 in case of ITC not claimed due, not available in GSTR 2A but available in February to August 2020. Due practically there has been no restriction on availment of the same.
      2. ITC claimed for the period February to August 2020 based on the invoice however subsequently credit has not been reflected in GSTR 2A would require reversal t comply with Rule 36(4). There would be many vendors who would not have filed returns due to COVID 19 pandemic. Time would lapse for the availment of credit for February and March 2020. Follow up with the vendor for compliance under GST or withholding of tax amount for invoices pertaining to the vendor not filed or inappropriately filed would be a measure to overcome.
      3. For reversal of ITC in case of the invoice not available in GSTR 2A to comply with Rule 36(4) whether interest would be applicable? Clarity has not been provided for the same. However, understanding the practicality of the same, interest would be applicable for the reversal of ITC.
   6. Amnesty Scheme: Amnesty scheme has given waiver or reduction of ITC however such reduction has not been provided for interest payable hence it would be advisable to file the returns as soon as possible to comply with the reduction in payment of interest.

Conclusion

Considering the huge impact of COVID 19 pandemic in the business, the arrangement of working capital has become a greater challenge to run the business. However not complying with the tax laws would lead to the additional burden of interest and the late fee being added to the cost of the organization. In addition to that availment of credit has been majorly dependent on supplier compliance under GST which has led to dependency with the other parties’ compliance. However, in case, the tax has not been paid before 20^th October 2020 (unless extended) shall be paid through Form GST DRC 03.

Compliance of various procedures stated above is time-consuming, hence starting earlier would ensure better compliance and also would lead to appropriate disclosures in annual return and reconciliation statement.

Special thanks to CA Akshay Hiregange for inputs. The author could be reached at [email protected] for any queries /feedback