Understanding Input Tax Credit Claims in India's Updated GST Return System
This article clarifies the process of claiming Input Tax Credit (ITC) within India's Goods and Services Tax (GST) framework, specifically detailing the current and proposed new return filing systems. It outlines how ITC is claimed under existing GSTR-1 and GSTR-3B procedures, comparing it with the anticipated e-invoicing and annexure-based approach. The discussion also covers mechanisms for handling invoices not uploaded by suppliers and the role of Section 43A in facilitating ITC claims.
Input tax credit (ITC) refers to the tax paid on acquired goods or services that can be offset against the tax liability incurred from sales. The anticipated new GST return filing system aims to streamline the process of regular return submissions and simplify ITC tracking. This article thoroughly examines the method for claiming Input Tax Credit on purchases, encompassing both goods and services. It specifically addresses ITC claims under the new GST returns system, which was initially slated for implementation in April 2020 but has since been put on hold.
Comparison Between Current and Future GST Returns
Under the current system, utilizing GSTR-1 and GSTR-3B, recipients claim tax credit based on sales invoices uploaded by the seller or supplier. Provisional credit, allowed without an invoice upload, is capped at 5% of the eligible ITC reflected in GSTR-2B (previously GSTR-2A). This differs significantly from the pre-GST regime, where credit was granted based on purchase invoices held by the buyer.
However, the proposed new GST return framework intends to govern the entire ITC claim process through e-invoicing, ANX-1, and ANX-2. Historically, a problem arose where buyers claimed credit on tax invoices issued by sellers who then failed to remit taxes to the government, leading to revenue loss. Consequently, a mechanism was deemed necessary to ensure credit is only available to the purchaser once the seller has actually paid the tax to the government.
Claiming ITC Under the Existing GST Return System
Currently, the procedure for claiming GST credits involves these steps:
- Sellers are required to upload invoice-specific sales data monthly or quarterly by the 11th of the subsequent month (or 13th of the month following the quarter), depending on their GST portal GSTR-1 filing frequency.
- Invoices uploaded by sellers in GSTR-1 are viewable by purchasers in their GSTR-2B form.
- Purchasers can claim input tax credit in GSTR-3B based on the tax invoices provided by the seller, as presented in their GSTR-2B. Claims can extend up to 105% of the eligible ITC in GSTR-2B for a given tax period. This permits taxpayers to claim an additional 5% ITC for invoices or debit notes not uploaded by corresponding suppliers in GSTR-2B. This provisional claim must be reconciled and adjusted in subsequent tax periods once the suppliers upload the relevant invoices.
It is important to note that if the provisional input tax credit claimed on purchases in GSTR-3B exceeds the input reflected in GSTR-2A, the tax department may issue a notice requesting an explanation. The department reserves the right to deny credit for invoices where the seller has not remitted the tax.
Claiming ITC Under the Proposed New GST Return System
The new GST returns system operates with a single return (RET-1, RET-2, or RET-3) supported by two annexures: ANX-1 and ANX-2. ANX-2 is particularly crucial because taxpayers can use it to accept, reject, or mark invoices as pending for ITC claims. The following table illustrates the structure of the new GST return system:
| Annual Turnover | Return Type |
|---|---|
| More than Rs.5 crore | Regular Monthly Return |
| Less than Rs.5 crore | a) Regular Quarterly Return b) GSTR Sugam Return c) GSTR Sahaj Return |
Taxpayers with a turnover below Rs.5 crores will have the option to file quarterly returns and one of the aforementioned specific return types.
- Suppliers will have the flexibility to continuously upload invoices throughout the month, making them instantly visible to the recipient.
- Invoices submitted by suppliers will be automatically populated in the recipient's annexure for inward supplies in real-time. Recipients can view these invoices via a dedicated "viewing facility" on the portal.
- After the 10th of the following month, recipients can take specific actions on the invoices available in the "viewing facility": - Accept: To utilize the credit. - Reject: If the credit is not desired or the transaction is irrelevant. - Pending: To claim the credit in a later period.
- Credits pertaining to inward supplies accepted by the recipient will be posted to the relevant input tax credit field in the recipient's return.
- Once a recipient accepts invoices, they become locked, preventing any further changes. For recipients managing numerous invoices, a bulk acceptance feature will treat all invoices as accepted and locked, except those explicitly marked as pending or rejected.
There will be no automatic reversal of input tax credit at the recipient's end simply because an invoice is uploaded but the supplier has not yet paid the tax. If a supplier fails to pay tax on a supply, recovery efforts will initially target the supplier. Reversal from the recipient would only occur in exceptional situations, such as a missing taxpayer, business closure by the supplier, inadequate supplier assets, or instances of illegal ITC claims by the recipient.
Invoices Not Uploaded by the Supplier
During the initial six-month phase of the new GST return system's implementation, recipients will be able to provisionally claim ITC based on self-declaration, even for invoices not uploaded by the supplier by the 10th of the next month. This is facilitated through the option of claiming ITC on missing invoices. The ITC claimed by the recipient for such missing invoices must then be filed by the seller within the subsequent two tax periods from the date the recipient claimed the input.
Should the supplier fail to file the missing invoice within this timeframe, the ITC claimed by the recipient will be reversed, along with applicable interest and penalties. For instance, if Mr. A purchases goods from Ms. B in April 2018, and Ms. B does not report this in her April 2018 returns, Mr. A can still claim the credit in his April 2018 returns. However, Ms. B must report it by June 2018. If she fails to do so, Mr. A's claimed ITC will be reversed in his July 2018 returns, incurring interest and penalties.
Significance of Section 43A in the New GST Return System
Section 43A was introduced into the CGST Act in 2018 through an amendment. This section established a mechanism for recipients to avail input tax credit even when suppliers do not provide complete details in their returns. Under Section 43A, Rule 36(4) was notified, allowing recipients to claim ITC, even for invoices not uploaded by the supplier, up to 10% (originally 20%) of the ITC available to the recipient in GSTR-2A.
This rule became effective from October 9, 2019. However, the 20% upper limit for provisional ITC claims stipulated under Section 43A requires amendment. With the introduction of the new GST returns system, these provisions will be modified or relaxed to align with the new return filing process. Further information regarding key changes in the new GST return system is available.