Understanding Input Tax Credit Reconciliation under GST
This article highlights the critical importance of reconciling GST returns, specifically GSTR-2A/2B and GSTR-3B, with an entity's financial records. It explains how such reconciliation prevents the loss of Input Tax Credit (ITC), enhances internal controls, aids in audit preparedness, and helps avoid penalties from tax authorities. The content details specific actions to take when discrepancies arise between GSTR-2A/2B and GSTR-3B, as well as providing guidance for aligning these returns with the company's books of accounts.
Understanding Input Tax Credit Reconciliation under GST
All businesses registered under GST must submit an annual return using Form GSTR-9, regardless of their annual revenue. Before submitting the annual return, it is compulsory to file GSTR-1 and GSTR-3B. The GSTR-9 form consolidates data from GSTR-1 and GSTR-3B but does not allow for corrections to previously filed data. Its purpose is data aggregation, not amendment. Therefore, maintaining consistency between an entity's financial records and its filed GST returns is crucial, which is achieved through reconciliation.
Why Reconciliation Between Returns and Books of Accounts Is Essential
- Preventing overlooked Input Tax Credit (ITC) claims: Businesses often fail to record all incoming invoices, which can result in lost ITC and higher tax payments. Regular reconciliation ensures that all eligible ITC is successfully claimed.
- Strengthening internal controls: Aligning supplier returns with internal accounting records establishes robust internal financial oversight. Reconciliation also facilitates prompt correction of any discrepancies found in the taxpayer's books.
- Supporting audit processes: Auditors can readily compare inward supply data from financial records with GSTR-2B or GSTR-2A to identify and request reconciliation for any inconsistencies. Therefore, taxpayers should perform monthly reconciliations and maintain accessible data for audit purposes.
- Avoiding tax department notices: Discrepancies can trigger official notices from the tax authorities, potentially leading to penalties. To prevent such issues, consistent monthly reconciliation and corrective actions for data mismatches are essential.
What to Do When GSTR-2B/2A Credit Differs from GSTR-3B
Within the framework of GST regulations, reconciling GSTR-2B or GSTR-2A with GSTR-3B is critical because ITC for an invoice can only be claimed if it appears in GSTR-2B or GSTR-2A. This reconciliation mechanism enables the tax department to confirm that all transactions within a specified period are accurately documented and reflected in the summary return, GSTR-3B. The table below explains the action points in case of mismatches:
| Sr.No. | Credit | Return | Case | Action |
|---|---|---|---|---|
| 1. | Excess credit is declared | GSTR-2A/2B | ITC is not claimed by the recipient in GSTR-3B. | They should claim the missing ITC in the month in which discrepancy is identified. |
| The supplier has shown excess outward supplies in GSTR-1. | They should rectify the same in GSTR-1 of the month in which discrepancy is identified. | |||
| 2. | Less credit is declared | GSTR-2A/2B | The supplier failed to upload the invoice. | The supplier is asked to rectify the same in the return of the month in which the discrepancy is identified. If the supplier fails to do so, the ITC claimed by the recipient gets added to the output tax liability in the next month. |
| Duplicate credit claimed by the recipient in GSTR-3B. | If the recipient has already corrected the same, no further action is required. If not, the excess ITC claimed is added to the output tax liability of next month. |
Note: For both scenarios described above, any differences in ITC details between GSTR-2A/2B and GSTR-3B must be clarified in GSTR-9, specifically under:
- Table 8E: ITC that was available but not utilized.
- Table 8F: ITC that was available but not eligible.
Addressing ITC Mismatches Between GSTR-2B/3B and Books of Accounts
Taxpayers encountering this situation must perform two distinct reconciliation processes:
Reconciliation of GSTR-2B/2A with Books of Accounts
This reconciliation involves dynamic data because GSTR-2A/2B data is sourced from vendor filings. Any GSTR-1 submission or amendment by a vendor necessitates a fresh reconciliation due to data changes.
Step 1: Pinpoint invoices that are present solely in the accounting records but absent from the GST portal (GSTR-2A), and vice versa, invoices found only on the portal (GSTR-2A) but not in the books.
Step 2: Invoice discrepancies can arise from several factors:
- A supplier might not upload invoice details to GSTR-1, even if the recipient has recorded the invoice and claimed ITC in GSTR-3B later once the supplier updates it.
- The recipient could have mistakenly claimed ITC twice in their accounting records.
- The supplier might have failed to file GSTR-1 or submitted an incorrect GSTIN.
- Variations in the timing of invoice recording can also cause mismatches.
Step 3: Implement corrective measures for identified mismatches, following the guidelines provided in the preceding table.
Reconciliation of GSTR-3B with Books of Accounts
This reconciliation process involves static data, which the organization prepares and records internally.
Step 1: Verify that all GST challans paid by the organization are accurately entered into their corresponding Payables ledger.
Step 2: Compare the ITC claimed in GSTR-3B against the ITC recorded in the financial books. If discrepancies are found, make the necessary adjustment entries.
Step 3: Reconcile the GST output declared in GSTR-3B with the output recorded in the accounting records. Post adjustment entries for any mismatches.
Step 4: Align the Electronic Credit Ledger with the organization's Trial Balance.
Step 5: Correct any errors identified in GSTR-3B within the returns filed for subsequent months.