Understanding the Electronic Credit Reversal and Reclaimed Statement (ECRS) in GST

Tracking input tax credit (ITC) reversals and subsequent reclaims became more complex after changes in GSTR-3B reporting. To address this, the GST Network introduced a new ledger in August 2023. This Electronic Credit Reversal and Re-claimed Statement (ECRS) enables taxpayers to monitor the balance of temporarily reversed ITC that can be reclaimed later. This article explains this new functionality, necessary actions for taxpayers, and its implications.

What is the Electronic Credit Reversal and Reclaimed Statement?

The GST portal has implemented the ECRS, a system similar to existing electronic cash or credit ledgers. It provides a real-time balance of ITC that has been reversed and subsequently reclaimed by a specific date.

This facility commenced for:

• Monthly filers: From the August 2023 return period.
• Quarterly filers: From Q2 (July-September 2023) return period.

Taxpayers can access this ledger by:

• Logging into the GST portal and selecting "Report ITC Reversal Opening Balance."
• Navigating from the homepage: "Services" >> "Ledger" >> "Electronic Credit Reversal and Re-claimed Statement" >> "Report ITC Reversal Opening Balance."

Why was ECRS Introduced?

Taxpayers manually reported ITC reversals and reclaims in Table-4 of their GSTR-3B returns, requiring them to perform reconciliations. Furthermore, tax authorities lacked a mechanism to verify if a claimed ITC pertained to a temporary reversal from a previous period, which might arise from situations like CGST Rule 37, CGST Sections 16(2)(b) and (c), auto-populated credit notes, or past inadvertent errors.

Reclaimable ITC, previously reversed in Table 4(B)(2) of GSTR-3B, can be subsequently claimed in Table 4(A)(5) once specific conditions are met. Such reclaimed ITC in Table 4(A)(5) must also be explicitly declared in Table 4D(1).

The ECRS ledger benefits both taxpayers and tax authorities by providing clear visibility of the reversed ITC balance and the maximum eligible amount for reclaims on any given date. Key advantages for taxpayers include:

• Facilitating the tracking of ITC reversed in Table 4B(2) and later re-claimed in Tables 4D(1) and 4A(5) for each reporting period.
• Ensuring that reclaimed ITC corresponds accurately to previously reversed ITC.
• Helping to prevent clerical errors.

How Does ECRS Operate?

Taxpayers are required to declare their initial balance of ITC that has been reversed but not yet reclaimed. The GST portal then records monthly or quarterly reversal and reclaimed amounts. A validation check has been integrated into the GSTR-3B form.

Temporary ITC reversals that are eligible for future reclaim include:

• Rule 37: ITC for outstanding purchase invoices not settled within 180 days.
• Section 16(2)(b): ITC on goods or services not yet received.
• Section 16(2)(c): ITC where suppliers have failed to remit their GST dues.
• Auto-populated credit notes.
• ITC incorrectly claimed in Table 4(A) in prior tax periods due to unintended errors.

The GST system issues a warning if a taxpayer attempts to reclaim an amount in Table 4D(1) that exceeds the total ITC reversal balances from preceding periods plus the current period’s ITC reversal in Table 4B(2).

Actions for Taxpayers to Maintain Compliance

Taxpayers must declare their accumulated ITC reversed balance as a one-time activity. Reporting this opening balance within the specified deadline is crucial to ensure the continued benefit of deferred ITC.

The deadline for reporting the ITC reversal opening balance is January 31, 2024.

• For monthly filers: This applies up to the July 2023 return period.
• For quarterly filers: This applies up to the Q1 (April-June 2023) return period.

Taxpayers are permitted three opportunities to amend any errors in the opening balance:

• Until January 31, 2024: Both initial reporting and amendments are permitted.
• From February 1, 2024, until February 29, 2024: Only amendments are allowed.
• After February 29, 2024: No further amendments will be possible.

Example of ITC Reversal Opening Balance

Consider Exzeed Ltd. with the following ITC reversal opening balance as of July 1, 2023:

• CGST: Rs. 19,000
• SGST: Rs. 20,000
• IGST: Rs. 9,000

In July 2023, the company reversed IGST of Rs. 10,000 because raw materials for an ITC claimed in June 2023 were not received upon inspection. Additionally, Exzeed Ltd. reversed CGST and SGST of Rs. 20,000 each for professional services bought in May 2023, as the vendor, Joe & Co, failed to pay tax dues.

Exzeed Ltd. had reversed ITC of Rs. 15,000 each for CGST and SGST in June 2023. These amounts were reclaimed in July 2023 after the raw materials were received. ITC reversal may also incur an interest charge.

The opening and closing balances for the month are calculated as follows:

Necessary Process Changes for Ongoing Compliance

The implementation of a dedicated statement or ledger on the GST system for tracking ITC reversals and reclaims necessitates additional actions by taxpayers, including:

• Performing a reconciliation from April 2022 to the current date for all claimed, reversed, reclaimed, and ineligible ITC, as well as pending reclaims, to determine the correct opening balance for the ITC reversal statement.
• Conducting frequent reconciliations between GSTR-2B, GSTR-3B, and the purchase register across periods to prevent double reclaims or missed reclaims.
• Establishing a separate ledger in the books of accounts specifically for ITC reversals and reclaims, if not already in practice.
• Maintaining distinct accounting ledgers for temporary ITC reversals, separate from permanent ITC reversals or ineligible ITC.
• Documenting a clear trail of ITC claimed, reversed, and reclaimed to link reclaims back to initial claims, ensuring readiness for audits.

The introduction of the electronic credit reversal and re-claimed statement in GST simplifies the tracking of temporary ITC reversals and reclaims for taxpayers. This system aims to help businesses avoid interest payments resulting from incorrect calculations of excess reclaims.