India: Electronic Credit Reversal and Re-claimed Statement – one more reconciliation and probable opening for litigation under GST

published on 1 December 2023 | reading time approx. 5 minutes

The implementation of the GST Regulation from July 2017 has been stormy and though the intention is to curb the revenue leakage of Government Exchequer with the help of self-assessment/compliances by the taxpayers. However, the mechanisms implemented time and again to curb the revenue leakage caused by certain malpractices are always adding to the misery of the genuine taxpayer who are carrying out the compliances.

Burden on the recipient of goods/services »
Different modes of payment of GST »
GSTN Advisory email communication to taxpayers for Rule 37A »
ITC reconciliation with GSTR 2B or GSTR 2A? »
Never Ending Litigation »
Conclusion »

One of the latest significant steps to streamline the Goods and Services Tax Network (GSTN) and ensure that taxpayers report precise information regarding Input Tax Credit (ITC) availed, ITC reversal, ITC re-claimed, and ineligible ITC. One of the recent developments of GSTN is the electronic credit reversal and re-claimed statement to facilitate the taxpayers in correct and accurate reporting of ITC reversal and reclaim thereof and to avoid clerical mistakes. This statement is designed to help taxpayers track ITC that has been temporarily reversed and subsequently re-claimed in each return period.

The temporary reversal of ITC would be on account of:

Non-payment of consideration to supplier within 180 days
Goods or services not received by the recipient
Taxes not paid to the Government by the supplier
The supplier has not filed GST returns

Taxpayers are being provided a facility to report their cumulative ITC reversal (ITC that has been reversed earlier and has not yet been reclaimed) as an opening balance for the "Electronic Credit Reversal and Re-claimed Statement." The taxpayers have the opportunity to declare their opening balance for ITC reversal until 30 November 2023, with three opportunities for amendments during this period. However, after 30 November until 31 December 2023, only amendments will be allowed, and no fresh reporting would be permitted.

In view of the strict deadline of compliance, a question still arises, if a taxpayer misses the reporting deadline of 30 November 2023, will the ITC become a permanent loss of ITC and answer thereof obviously will be subject judicial scrutiny.

In the present article, we wish to discuss whether introduction of "Electronic Credit and Re-claimed Statement" would play a significant role in simplifying tax compliance for businesses or would further contribute to an already challenging situation on account of practical/technical challenges of GST network. We have highlighted few of the practical hardships faced by the taxpayers while complying with the said provisions as under:

Burden on the recipient of goods/services

As per the provisions under GST law, ITC would be available to the recipient of goods or services subject to the payment of tax by the supplier. This puts a requirement on the recipient to ensure that his supplier has paid the tax to the Government, thereby putting an onerous burden on the recipient.

Different modes of payment of GST

As per GST Rules, the taxpayers are required to reverse ITC, if the supplier has not paid taxes through GSTR-3B. However, while prescribing the additional condition, the other recognized payment mechanisms under GST Regulations are completely overlooked.

Suo moto payment of taxes in Form DRC-03

The suo moto payment mechanism which are recognized under GST Regulations for payment of taxes through Form GST DRC-03 on account of self-assessment, pursuant to annual return compliance etc. are not considered as payment for the above referred compliance. In fact, such payment cannot be verified at the end of the recipient as well.

Payment of taxes by Quarterly Return filing and Monthly Payment of taxes (QRMP) taxpayers

Under QRMP scheme, taxpayers are required to pay taxes on a monthly basis via GST challan (Form GST PMT-06) and file return in Form GSTR-3B on quarterly basis.

In the present case, since return in Form GSTR-3B is filed only on quarterly basis, the payments made via challans (Form GST PMT-06) are not reflected in GSTR 2A as “GSTR 3B filed”. In fact, for the first two months of the quarter, the system auto populates that the supplier has not filed return in Form GSTR-3B and accordingly ITC pertaining to the invoices reported vis facility of IFF are not entitled.

Therefore, a question arises as to whether the compliance by way of reversal ITC still arises where the supplier has paid taxes through other modes? If this is so, then it would be against the object of provisions under GST Regulations. Further, as these are case specific facts, might result in hardship and litigation for the taxpayers.

GSTN Advisory email communication to taxpayers for Rule 37A

The Advisory does not state the methodology of computing the system-generated amount. In absence of such details, the taxpayers may find it difficult to reconcile the emailed figure with their internal reconciliation mechanism. Thus, the taxpayers might not have much time to reconcile the system-computed amount with the amount considering the fact that such advisory and email are issued on 14 November 2023 only whereas the due date of compliance is 30 November 2023. Further, the Advisory issued in this regard did not state whether taxpayers are provided with any option to reply/raise a query if any inaccuracy is found in the system-computed amount.

In view of the above, in case a taxpayer does not reverse the whole or part of the system computed amount intimated vide email, it is unclear as to whether the taxpayer would get a notice for further proceedings. Further, the authorities may also permanently disallow the ITC considering the fact that temporary reversal is not reported by the taxpayer on or before 30 November 2023 as discussed above. Hence, the cases of genuine hardship and notices being issued will increase the efforts for assessee as well as tax authorities to verify and will increase potential litigation.

ITC reconciliation with GSTR 2B or GSTR 2A?

As per the provisions under GST law, ITC would be available subject to filing of Form GSTR 3B by the supplier. The Form GSTR 2B is a static statement, with details auto-generated based on information furnished by suppliers. ITC available in the Form GSTR 2B is auto populated in the Form GSTR 3B and accordingly most taxpayers reconcile their books with GSTR 2B.

However, it is pertinent to note that presently the Form GSTR 2B does not provide information on whether the supplier of goods or services has filed GSTR 3B or not which information is available in Form GSTR 2A presently. Further, while filing GSTR 9, taxpayers are expected to reconcile ITC with Form GSTR 2A. Thus, to comply with provisions under GST law the taxpayers would have to reconcile their books with Form GSTR 2B on monthly basis whereas with Form GSTR 2A on annual basis which merely results in additional compliance burden on the taxpayers.

The aforesaid burden may result in increased cost for the taxpayer as well by way of interest liability as per GST Regulations in cases where ITC is fully utilized by the taxpayer.

Therefore, necessary steps shall be taken by the Government for “Ease of Doing Business in India” and reduce the hardships faced by the taxpayers by collating all the required information in one single form and allowing the taxpayers to reconcile ITC with the one single form and not multiple forms.

Never Ending Litigation

Nowadays, GSTN is issuing intimation vide FORM DRC-01B or FORM DRC-01C for differences in outward GST liability (GSTR 1 & GSTR 3B) or claiming excess input tax credit (GSTR 3B & GSTR 2B) respectively on monthly basis. Issuance of such intimation on monthly basis would put taxpayers in a dilemma i.e. whether to run/manage their business or indulge themselves in such compliances. Further, non-compliance to above provisions would also add to un-necessary litigation.

It is also important to note that the accuracy of opening balances reported by the taxpayers under Electronic Credit and Re-claimed Statement might also be subject to scrutiny and litigation in the absence of any mechanism is prescribed in this regard for verification by the authorities.

Conclusion

The above mentioned hardships would result in increased litigation and disputes between the taxpayers and the revenue authorities. Also, the additional compliances will create a burden on taxpayers which would defeats the very purpose of ease of doing business and discourage investments in India.

Thus, the Government in collaboration with GSTN should take necessary steps to reduce the hardship faced by genuine taxpayer and to align the GST portal with GST Regulations.

Taxpayers may also file suitable representation before the GST Council to issue clarifications for regulatory amendments/ circulars which will reduce the hardship faced by businesses in India and bring uniformity of implementation of compliance.