Fixing input tax credit: Get ready for new GST return filing system in 2019

One of the fundamental principles of goods and services tax (GST) was the concept of ‘self-policing’, wherein the matching concept for claiming input tax credit was introduced. The matching concept effectively allows a buyer to claim input tax credit only when his vendor is compliant in terms of filing GST returns and paying taxes to the government.  This was a departure from the earlier laws, barring VAT legislation in a few states.

The reconciliation of input tax credits was initially envisaged to happen online on the GST Network (GSTN) portal, wherein a buyer was supposed to take action to accept or reject an invoice reported by his vendor for the purpose of claiming credits. However, due to the sheer volume of transactions and technological complexities involved, this process of online credit matching on the portal itself could never take-off. Nevertheless, the government still mandated businesses to reconcile their input tax credit claims and sought to restrict the eligible credit amount to the extent of invoices appearing on the portal in a form called GSTR-2A (auto-populated on the basis of the invoices reported by suppliers in their GST Return i.e. GSTR-1). 

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For the purpose of claiming credits against invoices for the financial year ended March 2018, the timeline for claiming credit was the due date of filing the return for the month of September 2018. In the recent GST Council meeting held on December 22, this date has been extended to the due date of filing GSTR-3B for the month of March 2019. This is a great relief to the industry as most large companies are still having huge amounts of un-reconciled credits, particularly because this was the first year of GST and many vendors may not have reported their transactions properly, even where tax has been deposited with the government. Now, they have an opportunity to dig deeper into the un-reconciled amount and recoup the credits, which they would have lost otherwise.

The government now proposes to introduce new return filing system, possibly by April 2019. Under the new system, input credit would only be limited to the extent it is reflected on the GST portal. This means that the reconciliation of input tax credit would still be needed, but not on the portal. This will be done offline and dealt with commercially, between the supplier and the buyer. This is likely to be an efficient system as the burden on GST portal would be limited.

From a business standpoint, this means greater control over the vendor’s compliances and on-boarding process. Many companies are exploring to change their vendor payment process by linking it with their GST compliance and reporting of the transaction (which can be seen on a real-time basis). This would mean a substantial change in the procurement process and could entail changes in contracts, purchase orders and so on.  Large companies dealing with thousands of small vendors would need to ensure that they understand the criticality of this change and are adequately geared up for this change.  

There is an argument that the customer should not be penalised for a non-compliance on part of the supplier. However, the government believes that the success of GST depends on a compliant ecosystem, wherein stakeholders themselves promote the culture of tax compliance.  Hopefully, the government would be able to strike a balance by fixing the input credit conundrum. 

The writer is partner and leader indirect tax – PwC India. He was assisted by Sumit Bansal, associate director, indirect tax, PwC