Input Tax Credit – Procedure to claim April 2021 onwards

Introduction

Recently, there have been multiple amendments and notifications under GST. This leads to difficulty in confirming whether an entity is in compliance with the GST law or not. Some of the recent changes are:

• E-invoicing being introduced in a phased manner from October 2020.
• Finance Act 2021, having major modifications but not yet notified
• Pandemic lockdown related notifications
• Rule 36(4) – 5?-hoc credit reduction and validity

Considering industry hardship and ambiguity in GST claim, this article has been prepared for ease in ITC claim procedure from April 2021 onwards. This document could be used as in limited GST-ITC SOP (standard operating procedure)/imbibed into the existing ITC claim procedure of an entity.

Step 1 – Identify Credits

1. Identify eligible credits as accounted in the books of accounts.
2. Eligibility requires satisfaction of conditions u/s 16, which can be summarised as follows:

1. Availability of invoice/e-invoice (incl. debit note)
2. Such invoice/debit note is disclosed in GSTR 1 of the vendor (see*note below)
3. Actual or constructive receipt of goods/services
4. Tax has been paid to the government (see #note below)
5. Recipient has filed GSTR 3B

*note – Provision has been introduced in Finance Act 2021 but is yet to be notified to be considered effective under GST law.

#note – Verification of whether vendor has paid tax to the government, although, this is practically impossible. Therefore, considering a well-established legal maxim Lex non cogit ad impossibilia (law does not compel a man to do that which he cannot possibly perform)” coupled with the fact that the Constitution of India provides the right to do business and anything which restricts such function can be questioned, we can conclude that a recipient cannot be enforced to verify whether tax has been paid to government to avail credit under GST without a functionality being provided by the department (For example implementation of GSTR 2 & 3 which has been deferred indefinitely). Although, a declaration from the vendor could be obtained that such tax was paid to the government.

Some favourable rulings w.r.t ITC:

• Benefit of ITC cannot be denied on account of non-payment by supplier - M/s Onyx Designs vs ACCT (Karnataka High Court) – GST period; Kay Kay Industries – Hon’ble Supreme Court - Civil Appeal 7031 (2009) – Service Tax.
• Mere availment of ITC without utilization not liable for interest - Commercial Steel Engineering Corporation vs State of Bihar (Patna High Court) – GST period
• Interest cannot be levied on Gross liability before adjusting ITC - Refex Industries Ltd vs ACCGST & CE (Madras High Court) – GST period
• GSTR-1 Amendment allowed after time limit u/s 37 to enable credit to recipient - The High Court of Madras in the case of M/s. Sun Dye Chem Versus The Assistant Commissioner (ST) 2020 (11)

3. Based on the ineligibility conditions u/s 17, credits may need to be bifurcated as ineligible as transferred to expense accounts. Ineligible ITC u/s 17(5) – may refer this article for in depth analysis and possible benefits being missed out - https://taxguru.in/goods-and-service-tax/gst-itc-ineligible-changes-w-e-f-1st-february-2019.html

Step 2 – Reconcile Credits

Decision to use GSTR 2B instead of GSTR 2A as the data in the GSTR 2B remains static unlike in GSTR 2A which is dynamic and changes as and when vendors file (even on delayed basis). This will reduce reconciliation ambiguity and provide clarity.

Update – Due to various returns extensions due to the pandemic, GSTR-2B for April 2021 will be generated on 29th May 2021.

How to perform reconciliation of ITC?

1. Download GSTR 2B after GSTR 1 due date (T+2 days) for reconciliation
2. Other than matching entries, reasons for mismatches to be bifurcated and suggestions:

3. After above steps, eligible ITC to be claimed in GSTR 3B.
4. Any ‘pending’ credits need to be re-looked at every month before filing GSTR 3B.

Update – Due to pandemic situation, GSTR-2B Vs GSTR 3B reconciliation as per Rule 36(4) for April 2021 can be performed while filing May 2021 GST returns. From 1^st January 2021, the ad-hoc credit which could be claimed was reduced from 10% to 5%. This may go from 5% to NIL, once Section 16(2) (aa) is notified wherein the Act would override the Rule.

Communication with taxpayers – GST portal has introduced a functionality to communicate with recipient or suppliers. (Under ‘Services > ‘User Services’). The inherent limitation that communication may not reach the intended persons remains (Operations team/Accounts Payable team of supplier). Some features of the utility are as follows:

1. 5. Read and reply options available
   5. Email & SMS notification sent to registered details
   5. Missing invoices can be uploaded by recipient to the supplier
   5. Limit – 100 notifications to a GSTIN
   5. Payment status can also be provided to suppliers

Step 3 - YTD Tracking

It is suggested to maintain 3 ledgers on year to date (YTD) basis

1. 5. Eligible ITC as per books of accounts
   5. Eligible ITC as per GSTR 2B
   5. ITC claimed in GSTR 3B

Advantages of maintaining YTD information:

• Help ensure all pending ITC, in GSTR 2B/Books of accounts would be considered.
• No credit loss - due to time lapse or missed out
• Easy identification for follow up with vendors
• Helps make vendor payment decisions

Vendor management

Due to various changes in the law, restrictions in credit claim and follow up with vendors. Some useful tips have been provided:

1. Vendor on-boarding – ensure KYC is completed. Could include – name, business description, classification of goods/services, communication address, contact details including escalation matrix, GST registration certificate.
2. Vendor categorisation – based on size of the vendor, brand value, consistency in filing GST returns, market view on said vendor.
3. Documentation – Purchase order, verification of vendor invoice to PO, agreement with terms and conditions.

Based on the above information, vendors could be categorised wherein for non-compliant/ unorganised vendors payment terms could be amended. Suggest making payment of tax element of the invoice after GSTR 1 details are uploaded by vendor and the same reflects in GSTR 2B.

Step 4 – ITC reversals

ITC reversals may apply when payments are not made to vendors within prescribed limits or when credits are utilised against exempt supply. Computation would be as per Rule 37 (180 days non payment), 42 & 43. Some useful information to be considered during ITC reversal:

• Retention money need not be considered as payable for ITC reversal under Rule 37
• Interest against delayed ITC reversal under Rule 37 – 18%
• ITC reversal computation under r42 (inputs/input services) & r43 (capital goods) are different.
• Rule 42 computation to be re-computed on annual basis. Adjustments to be considered before September month return after financial year end.
• Some common exempt supply under GST includes
  • Outward supplies liable under RCM
  • 1% of sale value of securities (mutual funds, equity, etc.)
  • Sale of land and/or building
  • Slump sale as a going concern
  • Sale of duty scrips (MEIS/SEIS)

Step 5 – RCM liability

Expenses liable under RCM, would be eligible for credit upon payment subject to Section 17(5) restrictions. Some important information on RCM:

• RCM credit can be claimed in the same month as liability.
• Some RCM liability may not be eligible as credit. For example:
  • GTA expenses in relation to supply of exempted goods
  • Renting of motor vehicle where vehicle is less than 13-seater. 
• Import of services can be identified through foreign currency payments (Form 15CA/CB)
• Expense ledgers which could indicate RCM liability
  • Housekeeping/security expense – security personnel services – 18%
  • Conveyance/transport expense – Renting of MV/GTA service – 5%
  • Professional expenses – Legal – 18%
  • Sitting fees – Director remuneration – 18%
  • Books/subscriptions, Royalty expense – Import of service – 12%/18%

Where RCM liability was inadvertently discharged by the supplier himself, the following Service Tax case law could be used – Umasons Auto Compo Pvt Ltd Vs Commissioner of Central Excise & Customs, Aurangabad [2014 – TIOL – 126 – CESTAT – MUM].

Although, a declaration from the vendor could be obtained that such tax was paid to the government.

Step 6 – Vendor E-invoice

E-invoicing introduced from 1^st October 2020 has been made mandatory for entities having more than Rs. 50 crore turnover from 1^st April 2021.

Rule 48(5) indicates that any person who is required to follow e-invoicing provisions, is required to provide tax invoice with Invoice Reference Number (IRN) and QR code.

Some suggestions have been provided against the difficulty a customer/recipient may face:

1. How is the recipient allowed to identify if vendor is required to follow e-invoice provisions?

Ans: E-invoice govt. website displays the list of GSTINs where e-invoicing is enabled. It also provides updated list of GSTINs generating e-invoices presently.

• https://einvoice1.gst.gov.in/Others/EinvEnabled
• https://einvoice1.gst.gov.in/Others/GSTINsGeneratingIRN

Alternatively, if the process is cumbersome, a declaration could be obtained from vendors on non-applicability of e-invoicing provisions.

2. Can the recipient be penalised if supplier is non-compliant with GST law?

Ans: Department could dispute credit claimed on tax invoice without IRN & QR code. Although, this could be disputed if serial (a) is documented.

Step 7 – Other Important Learnings

For most common eligible/ineligible credits and tips on accounting expenses and credit, refer below:

1. 5. Common eligible credits:
      1. Raw materials (incl. normal loss)
      2. RCM on import of service (verify form 15CA/CB for liability)
      3. RCM credit in relation to renting of motor vehicles (13-seater or more)
      4. Plant & Machinery linked construction credits
      5. Insurance credits (incl. employee gratuity)
      6. Admin expenses – bank charges, telephone, internet, etc.
      7. Employee expenses - Uniform, shoes, etc.
      8. Business travel expenses
      9. Import of goods, especially those without payment (DDP basis).

1. 5. Common ineligible credits:
      1. Credits directly in relation to outward exempt supply unless goods or service exported
      2. Raw materials/Inputs – abnormal loss only
      3. Construction of immovable property related credit
      4. Health and life insurance
      5. Motor vehicle credits (incl. insurance and repairs & maintenance)
      6. Food & beverages (restaurant or catering)
      7. Invoices where GSTIN has not been mentioned by vendor

1. 5. Tips on accounting in books of accounts:
      1. Create separate ineligible credit ledgers to help identify and maintain track for internal reviews and disclosures in GST returns
      2. Enforce cut-off dates for accounting, i.e. do not allow back dated entries to avoid reconciliation issues and missed out credits.
      3. Introduce a maker-checker policy, wherein checker is well versed with GST provisions and can rectify classification of expenses.

1. 5. Disputable areas w.r.t ITC:
      1. Time limit as per Section 16(4) does not apply to Customs related documents, as it mentions only ‘tax invoice’ and ‘debit note’. Therefore, credit in relation to Bill of Entry could be claimed irrespective of tax period.
      2. TR-6 Challan (generally generated during EOU debonding/exit procedure) – not listed as a Customs document under GST. Although, in erstwhile law was mentioned in CENVAT Credit Rules. This anomaly cannot take away the substantial benefit of credit and therefore ITC under GST based on TR-6 challan is eligible in the author’s view.
      3. Self-invoice provisions against RCM expenses from unregistered persons is not linked to time of supply provisions. This interpretation could lead us to raise a self-invoice at any point in time and claim the credit based on such self-invoice. (assuming RCM liability is accounted based on self-invoice). Note, interest for delayed payment of tax would apply.
      4. A general observation is that cross charge liability has not been discharged. Again here, as liability and invoice is accounted in a delayed manner, and invoice cannot and should not be raised in a back dated manner, the recipient would be eligible for credit based on present dated invoice raised.

Contents of this article depict the author’s view. The reader is expected to exercise due care and professional support upon implementation. Article written by CA Akshay Hiregange and vetted by CA Madhukar N Hiregange. The author can be reached at [email protected] .

This article was published on Taxguru in May 2021.