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Understanding Input Tax Credit Matching, Reversal, and Reclaiming under GST

This article clarifies the process of Input Tax Credit (ITC) matching, reversal, and reclamation under GST in India. It explains what constitutes a credit mismatch, the communication methods used by tax officers for discrepancies, and the steps taxpayers can take in response to scrutiny notices. The guide also details the rectification procedures for excess or duplicate ITC claims and the conditions for reclaiming reversed ITC.

📖 3 min read read🏷️ Input Tax Credit

Achieving full GST compliance necessitates accurate Input Tax Credit (ITC) claims. Businesses can benefit significantly from reports that highlight unmatched credit percentages, enabling them to collaborate with suppliers to reduce discrepancies.

Latest Updates As per the Budget 2022 updates, sections 42, 43, and 43A concerning ITC matching and reversal provisions have been eliminated with the removal of provisional ITC in the Finance Bill 2022.

What Does Credit Mismatch Imply for Scrutiny Notices?

Taxpayers frequently express worries regarding credit unavailability. Mismatched credit primarily refers to inconsistencies in credit amounts reported between GSTR-3B and GSTR-2B or GSTR-2A. It also includes discrepancies found between GSTR-3B and GSTR-1. Such inconsistencies across these returns will result in the issuance of scrutiny notices to the respective taxpayers.

Methods for Officers to Communicate Return Discrepancies

Official communications regarding discrepancies observed by an authorized officer are issued to the taxpayer via Form GST ASMT-10. This form typically includes the officer’s observations, specifies the timeframe for the taxpayer to submit an explanation in response to the notice, and may or may not detail the differing tax amount causing the discrepancy.

Taxpayer Actions Upon Receiving a Notice

Taxpayers who receive such notices can refer to Form GST ASMT-11 and Form GST ASMT-12 for further actions and responses.

Resolving Discrepancies

If a discrepancy arises, it can be rectified through the following methods:

Addressing Excess Input Tax Credit Claims

When an Input Tax Credit (ITC) claim discrepancy arises due to the supplier's declaration in their valid return, both the supplier and the recipient are informed. Upon receiving this notification, the supplier is required to amend the discrepancy in their valid return for the month the communication was sent. Should the supplier fail to rectify the issue, the previously claimed excess ITC will be added to the recipient’s output tax liability in the subsequent month. For instance, if a discrepancy is communicated in July and not corrected by the supplier, the ITC previously claimed will be added to the recipient’s output tax liability for August.

Handling Duplicate Input Tax Credit Claims

If an Input Tax Credit (ITC) claim is duplicated, the recipient is notified of this error. If no rectification is made, the duplicated ITC amount previously claimed will be added to the recipient’s output tax liability for the month in which the duplication was communicated. For example, if a duplicate claim intimation is issued in July and not promptly rectified, the ITC amount will be added to the recipient's output tax liability for July itself. Additionally, for such additions, the recipient must pay interest, capped at 18%, on the amount added to their output tax liability, calculated from the date of ITC availment until the corrections are reflected in the returns.

Reclaiming Input Tax Credit

Reclaiming Input Tax Credit (ITC) involves recovering amounts previously reversed due to discrepancies in supplier declarations or duplicate claims. A supplier can initiate a reclaim only if they declare the invoice and/or debit note details in their valid return for the period when the error or omission was identified, or when notification of the discrepancy was received. Any interest previously paid on an excess ITC claim will be refunded to the recipient’s Electronic Cash Ledger. However, no refund is permitted for duplicated ITC claims, as this constitutes a violation of GST regulations.

Frequently Asked Questions

What is the purpose of GSTR-2B in ITC matching?
GSTR-2B serves as an auto-drafted Input Tax Credit (ITC) statement, providing taxpayers with details of ITC available from their suppliers. It aids in matching claimed ITC with supplier declarations to ensure accuracy and prevent discrepancies.
How does a taxpayer respond to a GST ASMT-10 notice?
Upon receiving a GST ASMT-10 notice, a taxpayer must submit an explanation within the specified timeframe, addressing the observations made by the tax officer regarding discrepancies in their returns. This response is typically filed using Form GST ASMT-11.
What is the time limit for a supplier to rectify discrepancies in their return?
When a discrepancy is communicated, the supplier is generally expected to rectify it in their valid return for the month in which the communication was received to avoid the recipient's ITC being added to their output tax liability in the subsequent month.
Are there any penalties for late rectification of ITC discrepancies?
If a taxpayer fails to rectify excess or duplicate ITC claims within the stipulated time, the amount is added to their output tax liability, and they are required to pay interest, not exceeding 18%, from the date of availment until the amount is accounted for in the returns.
Can interest paid on reversed ITC always be reclaimed?
Interest paid on reversed ITC due to supplier declaration discrepancies can be refunded by crediting the recipient's Electronic Cash Ledger once the supplier rectifies the omission. However, no refund of interest is allowed for ITC reversed due to duplicate claims, as this is a contravention of GST provisions.