Registered taxpaying businesses, choose your suppliers carefully. Under Goods and Services Tax (GST), your ability to receive input tax credit (ITC) hinges on your suppliers:
- Accurately accounting for the taxes they collect from you on their GST returns (GSTR)
- Paying those taxes to the government in either cash or ITC
Any missteps by your suppliers may impede your ability to take advantage of ITC. Hence the need for taxpayers and suppliers to reconcile their data before filing final GSTR to the government. Let's take a closer look.
As a registered taxpayer, you can only receive ITC if the details on your suppliers' returns match the details on yours. To facilitate the process, the government has instituted an automated data reconciliation system allowing you to compare the collected taxes your suppliers report to the ITC you claim.
How does it work?
After suppliers file form GSTR-1, registered taxpayers can view form GSTR-2A. Registered taxpayers can then accept the details submitted by suppliers, or they can reject the details and file their own in GSTR-2.
Details filed in GSTR-2 will be available to suppliers in form GSTR-1A. At this point, suppliers will have two options: accept changes made by registered taxpayers in GSTR-2, or reject them.
If a supplier rejects the changes, the registered taxpayer will not be able to receive ITC.
After reconciling all the invoices and details mentioned therein, both suppliers and taxpayers will file form GSTR-3 and pay taxes as calculated.
GSTR-1 -> This form filed by the supplier will contain all the details of the outward supplies.
GSTR-2A -> This form will auto populate the relevant details from the supplier's GSTR-1 for the registered taxpayer to accept, reject, or edit.
GSTR-2 -> The taxpayer will input the final details of the inward supplies on this form and file it with the government.
GSTR-1A -> This form will auto populate the relevant details from the taxpayer's GSTR-2 for the supplier to accept, reject, or edit before finalizing and filing the previously submitted GSTR-1 form.
GSTR-3 -> Once details are reconciled, both the supplier and the taxpayer file form GSTR-3 and pay taxes.
Ultimately, the government determines the correct amount of allowable ITC by reconciling the data in the GSTR-1 and GSTR-2 returns filed by suppliers and registered taxpayers, respectively.
a) Invoice not entered. This can result if:
i) An invoice is reflected on GSTR-1 but not GSTR-2. This can happen when a supplier enters an invoice, but the records of the taxpayer don't reflect the existence of such invoice.
ii) An invoice is reflected on GSTR-2 but not GSTR-1. This can happen when a registered taxpayer enters an invoice, but the records of the supplier don't reflect the existence of such invoice.
b) Mismatched data. This could be the result of both suppliers and taxpayers entering invoices, but there are discrepancies in the details of the two invoices. These discrepancies might include:
i) Differences in the total amount
ii) Differences in the amount of tax
iii) Differences in HSN codes
iv) Differences in item descriptions
After GSTR-3 is filed by both suppliers and registered taxpayers, the GST portal will match the following details:
a) GST identification number (GSTIN) of the supplier
b) GSTIN of the taxpayer
c) Invoice number and date
d) Taxable amount
e) CGST, SGST, and IGST amounts
The GST portal will treat the ITC claim as matched if:
a) The registered taxpayer accepts the details filed in GSTR-2A without any amendment, and the supplier files GSTR-3 correctly.
b) The ITC claimed by the taxpayer is less than or equal to the GST deposited by the supplier on such supply.
The GST portal will treat the details of the ITC claim as unmatched if:
a) The registered taxpayer claims ITC in excess of the GST deposited by the supplier on such supply.
b) The supplier doesn't enter the invoice(s) pertaining to the recipient in GSTR-1.
c) The registered taxpayer claims duplicate ITC.
The government will communicate any discrepancies in ITC claims to suppliers in form GST MIS-2 and to the taxpayer in form GST MIS-1.
Suppliers and taxpayers will be given a period of time to rectify the discrepancies. If one or both of them rectify the discrepancy so as to match the ITC claimed by the recipient, such ITC will be allowed. Otherwise, the government will add the amount to the outward GST liability of the taxpayer, who will then be required to pay such liability.
Issues and challenges
Suppliers need to file GSTR-1 by the 10th of the following month. Reconciliation occurs between the 11th and 14th, as GSTR-2 must be filed by the 15th. Coordinating with all the suppliers and ensuring any corrections are made on time will be a time-consuming task requiring robust controls and organized systems on the part of both taxpayers and suppliers to ensure both parties fill out all forms correctly.
Avalara is an experienced application service provider (ASP) and partner of authorized GST Suvidha Providers (GSPs). To understand how our cloud-based application, Avalara TrustFile GST, can help you with GST compliance automation, contact us through https://www.avalara.com/in/products/gst-returns-filing.
The author can be reached at https://www.linkedin.com/in/hardik24/