Understanding DRC-01C Intimation for ITC Discrepancies between GSTR-2B and GSTR-3B under Rule 88D
Rule 88D of the CGST Act mandates a system-generated intimation, DRC-01C, when input tax credit claimed in GSTR-3B significantly exceeds the amount available in GSTR-2B. This mechanism, introduced following the 50th GST Council meeting, aims to address discrepancies in ITC claims. Taxpayers receiving a DRC-01C must provide reasons for the mismatch or pay the excess ITC within seven days, facing consequences like GSTR-1 filing blocks if non-compliant. Proactive reconciliation of GSTR-2B and GSTR-3B is essential to prevent such intimations.
During the 50th GST Council meeting on July 11, 2023, a new approach was proposed to manage mismatches in Input Tax Credit (ITC) between forms GSTR-2B and GSTR-3B. Consequently, CGST Rule 88D was officially enacted on August 4, 2023, through CGST notification 38/2023. This rule enables the GST system to automatically notify taxpayers about substantial ITC discrepancies found in these two return forms.
GSTR-3B is a summarized form encompassing details of total inward and outward supplies, Input Tax Credit, and taxes paid or collected by a registered individual during a specific tax period. Conversely, GSTR-2B is a system-generated, static statement that provides information about the ITC available for purchases and expenses within a tax period.
The DRC-01C form is comparable to the DRC-01B intimation, which addresses tax liability mismatches between GSTR-1 and GSTR-3B. This article delves further into Rule 88D concerning ITC discrepancies between GSTR-2B and GSTR-3B.
What is Rule 88D?
CGST Rule 88D establishes a system-based notification process for instances where the Input Tax Credit declared in GSTR-3B substantially surpasses the eligible ITC amount reflected in GSTR-2B, either by a specific percentage or a monetary value.
Upon identifying such discrepancies, taxpayers receive a system-generated intimation, Form DRC-01C. This notification is delivered to their GST portal login and registered email address, highlighting the identified mismatch. Part-A of DRC-01C communicates these details.
Recipients of this intimation are required to furnish explanations for the excess ITC claim in Part-B of the form, along with any supporting documentation, or alternatively, remit the amount corresponding to the excess ITC. This action must be completed within seven days of receiving the intimation.
Tax authorities will subsequently evaluate the taxpayer's response to verify the ITC claim and take appropriate measures.
Reasons for Mismatches Between GSTR-2B and GSTR-3B
Although GSTR-2B and GSTR-3B are designed for auto-population and alignment, discrepancies can arise. Some of these differences might be genuine and justifiable to a tax officer. Common reasons for variations in ITC reporting include:
- The supplier incorrectly reported figures due to clerical errors or wrong GST rates, which are then reflected in GSTR-2B.
- The supplier inaccurately categorized transactions, for example, reporting a business-to-business (B2B) transaction as business-to-customer (B2C), leading to its exclusion from GSTR-2B.
- The supplier incorrectly furnished details of inter-state transactions as intra-state or vice versa, resulting in an inaccurate reflection in GSTR-2B.
- Input tax credit was not claimed in prior tax periods because goods or services were not received during that period. This also covers cases where goods are received in installments.
- Failure to claim input tax credit in previous tax periods.
- Input tax credit on imported goods that do not appear in GSTR-2B.
- ITC claimed on inward supplies from Special Economic Zones (SEZ), which are not shown in GSTR-2B.
- Excess ITC reversal in previous tax periods that is subsequently reclaimed in the current tax period.
- Recrediting ITC after making payment to a supplier for an invoice, where such ITC was reversed earlier under CGST Rule 37.
- Recrediting ITC upon the supplier filing GSTR-1, where such ITC was reversed previously under CGST Rule 37A.
- The taxpayer submitted GSTR-3B with incorrect details and later amended these details in a subsequent tax period due to typographical errors or incorrect tax rates.
Effective Date of CGST Rule 88D
Rule 88D was initially recommended by the GST Council during its 50th meeting, which took place on July 11, 2023, and was presided over by Finance & Corporate Affairs Minister Smt. Nirmala Sitharaman.
Subsequently, the rule was formally notified on August 4, 2023, via CGST notification 38/2023. Therefore, its implementation commenced from August 4, 2023.
Time Limit for Replying to DRC-01C
The deadline for responding to the intimation is set at seven days from the date it is issued. If a taxpayer decides to pay the demanded tax along with interest, they must deposit the amount using Form DRC-03 and then confirm this payment in Part-B of DRC-01C within the stipulated seven-day period.
Format of DRC-01C (Part-A and B)
Part-A of DRC-01C, designated for Intimation, has been standardized by tax authorities. Part-B of DRC-01C, intended for the reply, has also been standardized by tax authorities.
How to Reply to DRC-01C?
On the GST portal, taxpayers should log in, click on the ‘Services’ tab, and navigate to Returns > Return Compliance > DRC-01C. They can then search for the relevant intimation using the return period, reference number, or status, and click on it. Part-A of DRC-01C will display the intimation details. Taxpayers should then take appropriate action: either pay the demanded excess ITC claim with interest or provide reasons for the ITC difference. The response is submitted by completing Part-B of DRC-01C with the particulars of the action taken.
Consequences of Not Complying with Rule 88D
If a taxpayer receives a DRC-01C intimation and fails to respond, they may be prohibited from filing the subsequent period's GSTR-1 and/or Invoice Furnishing Facility (IFF), as per CGST Rule 59(6). Furthermore, CGST Rule 88D specifies that any excess ITC claimed will be subject to demand and recovery provisions under Sections 73 or 74 of the CGST Act, potentially leading to a demand notice and adjudication.
How to Avoid DRC-01C?
It is crucial to regularly reconcile GSTR-2B with the ITC entries reported in GSTR-3B and the purchase register or books of accounts before filing returns. Automating this reconciliation process is advisable for greater speed, effectiveness, and efficiency compared to manual methods. This automation also enables teams to follow up with non-compliant vendors to ensure timely reporting of invoices in their respective GSTR-1/IFF.
Reconciliation should also span across tax periods to track reversals and reclaims accurately. This proactive approach ensures that if a business receives a DRC-01C intimation, the team can provide relevant reasons for any genuine ITC difference. Additionally, maintaining comprehensive documentation and an audit trail of ITC computations is recommended to ensure preparedness for any inquiries.