The credit of GST paid on expenses against the GST collected on revenue is the heart of a ‘value added’ tax system. Thus, GST credits are no lesser than cash when it comes to GST payment. During any audit or inspection, tax authorities would go through the credits to ascertain if ‘ineligible’ credits are claimed resulting into short payment of tax. The credit is allowed subject to certain conditions as well as compliances under the GST law.
Return to be filed for September happens to be the last return to take all credits pertaining the previous financial year. So what are the key steps? There are broadly five steps that are recommended to be undertaken.
First, a reconciliation is recommended between the books of accounts and GSTR 2A. GSTR 2A can be downloaded from the GSTN portal which comprises of supplies reported by the suppliers. Reconciliation is likely to throw some interesting perspective such as suppliers reporting supplies to a different GSTN i.e. a different State, missing reporting by suppliers, etc.
On the other hand, books of accounts may have captured incorrect invoice numbers on account of inadvertent errors by the accounts payable team or shared service center. Sometimes the invoices numbers are recorded with extra zeros, non-acceptable special characters, etc. This would lead to broadly two types of actions viz. follow up with the supplier to correct the particulars uploaded in their GSTR-1 or correct the entries made in the books of accounts.
Second, having reconciled the books and GSTR 2A, the next step would be to reconcile the credit which has been reported in GSTR 3Bs. Often, the entire credit is not claimed in the same month owing to various reasons such as lack of clarity on eligibility, dispute with the suppliers on the invoice value.
Third, adjustments on account of debit or credit note would also needs to be similarly considered.
Fourth, the overall credit for the previous year would need to be finalized in view of the exempt and taxable supplies made during the year. This would require computation of the value of supplies and, finally determining the credit eligible during for the previous year.
Lastly, trend analysis of the reasons for the reconciliation should be undertaken to prevent recurrence of mismatch. Often a pattern can be noticed. For instance, mismatches attributable to few suppliers, type of mismatches, geographies. Instead of a mere reconciliation of the numerical aspect, a qualitative methodology can be put in place. The reasons may be prioritized mostly in terms of financial impact and an action plan to take corrective measure for the year and monitoring mechanism may be prioritized mostly in terms of financial impact and an action plan to take corrective measure for the year and monitoring mechanism may be instituted say over monthly or quarterly basis. This is the most important step however, the most ignored one as well. This would help to eliminate the potential credit ‘gaps’ and reconciliation issues when the proposed ‘upload, lock and pay’ based credit mechanism is implemented.
To summarize, unlike the previous tax regime, under GST, credit is subject to various requirements. One such requirement is to report the invoices, credit and debit notes pertaining to the last year in the return to be filed for September 2018. The due date for filing the September return is 20 October except in case of newly migrated taxpayers who can file return by December 31. A reconciliation and review exercise of credit would, perhaps, be the last step to finalize the credit of the last year.