– By Yash Ahuja
Hailed as a landmark reform, the Goods and Services (GST) Tax in India was introduced to bring all the indirect taxes under a common tax regime to foster a common market in the country. Before the implementation of GST, India had a complex system of indirect taxation. Till around 1986, India had cascade taxes where indirect taxes were levied at each stage of taxation and actual tax was much higher than actual taxation depending upon the rotations of goods. This led to the cascading effect of taxes, resulting in an overall higher tax burden. The concept of Value Added Tax (VAT) was introduced in 1986, with the introduction of Modified Value Added Tax (MODVAT). However, the cascade effect was only minimized and not eliminated.
In 2005, many states in India implemented VAT, which further minimized the cascade effect in State Sales Taxes. However, the multiplicity of taxes remained a challenge as there were many indirect taxes in India. Therefore, the idea of GST was explored, and it was finally implemented on 1st July 2017, as a true value-added tax. The cascade impact was eliminated by a mechanism of transfer of the Input Tax Credit (ITC).
The transfer of ITC requires an electronic system where more emphasis is given to the filing of returns by suppliers, in place of physical invoices, as was the case in earlier VAT laws. The system report GSTR2A was introduced for the transfer of ITC, which was based on the filing of GSTR1 by the supplier. At the launch of the GST in India, the process for claiming ITC was clearly defined. The supplier or seller was required to file a return, known as GSTR1, with all the relevant details. This information would then be reflected in GSTR2A, which is an auto-populated form. The recipient or buyer of the goods or services could then claim the ITC based on the details mentioned in GSTR2A. The process aimed to simplify the claiming of ITC and ensure transparency in the system.
However, the initial stage of implementation was marred by several challenges including issues with the GST system, wrong invoice numbers, wrong GST numbers, incorrect data entry by accounts payable teams, non-filing of GSTR1 by vendors, and vendors choosing the quarterly option for GSTR1 but not filing Invoice Furnishing Facility (IFF) monthly.
To make things less burdensome, there were frequent changes in the rules for claiming ITC. Initially, there was no express provision to claim ITC, only if the same appeared in GSTR-2A/2B. Later, Rule 36(4) was implied, which restricted the claim of ITC to 120% of eligible ITCs for which documents were uploaded by the supplier in GSTR-1. The restriction was further revised to 110% and then 105%. From January 1, 2022, ITC can be claimed only for those documents for which details have been furnished by the supplier in their GSTR-1/IFF and appearing in GSTR-2B. All these may result in the delay/loss of ITC for organizations.
Reconciliation efforts that organizations lack
GST reconciliation was introduced to address the challenges of the new tax regime. The government realized that the taxpayer’s compliance with GST laws and regulations would be essential to the success of the new tax system. Reconciliation ensures that the input tax credit claimed by the taxpayer is accurate with no duplication or mismatch in the tax paid and liability. However, many organizations missed some critical aspects while settling various issues around GST reconciliation. The GST reconciliation process, in many cases, has few challenges like below.
(1) It does not follow proper and timely entries in books due to the usage of various software.
(2) The importance of proper accounting cannot be overstated and must be fixed as a priority.
(3) All GST payable, recoverable, reversal, and paid should be settled every month with proper accounting entries.
(4) GST credit ledger balance, cash ledger balance, and GST on hold should be reconciled monthly with proper entries passed, akin to bank reconciliation.
As GST has become a very data-intensive process, the Indirect Tax department of companies should have data analysts in addition to tax professionals to take care of this issue in future. Big data tools such as Python and robotic automation should be used wherever required to simplify the process
Measures to ensure proper GST Reconciliation
To ensure proper reconciliation of GST, it is imperative to adhere to certain key points.
(1) It is necessary to ensure that all monthly vendors file their GSTR-1 on or before the due date to avail themselves of Input Tax Credit (ITC) on their invoice/debit note in the same month.
(2) Quarterly vendors must upload their invoices/debit notes monthly in the Invoice Furnishing Facility (IFF) on or before the due date to avail ITC on the invoice/debit note in the same month.
(3) It is vital to conduct a monthly document-wise reconciliation of ITC as per books vis-à-vis ITC appearing in GSTR-2B using appropriate software. If any invoice/debit note does not appear in GSTR-2B for the same month, claiming ITC for the same will be difficult. In such cases, it is advisable to park the same in a ‘Deferred/Unclaimed ITC Account’ and claim it in a month when it appears in GSTR-2B. All other entries must also be booked correctly to ensure proper reconciliation.
(4) It is crucial to have an indemnity clause in the agreement/PO to ensure that any loss of ITC due to non-filing of GSTR-1 by vendors or incorrect filing of GSTR-1 leading to an invoice/debit note not appearing in GSTR-2B is indemnified by the vendor. Finally, it is recommended to develop a suitable policy and procedure for retaining the GST portion.
With the government covering more and more companies with e-invoicing and companies using the latest technologies with proper accounting, issues in GST reconciliation will become a thing of the past. The future of GST reconciliation looks promising, and it is essential to understand the GST reconciliation process to ensure that organizations are complying with the GST laws and regulations. By adopting the correct measures and ensuring proper accounting entries, companies can navigate the GST reconciliation process with ease.
(Yash Ahuja is the Chief Strategy Officer, Director-Finance at Panasonic Life Solutions India.)
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