Last Friday, Finance Bill 2022 was passed in the Lok Sabha, giving effect to various finance proposals of the government for the financial year 2022-23. On the Goods and Services Tax (GST) front, Finance Bill 2022 had proposed tighter laws governing GST returns, input tax credit (ITC) claims, and GST registration cancellations, among other changes. There were 39 amendments to the Finance Bill in total. However, none of them was related to GST. This means that the GST changes proposed by the government were accepted as is.
Section 38 becomes a part of the Finance Bill 2022; yet to be notified
For GST-registered taxpayers, the new changes to the law come as a bit of a blow while yet to be notified. Especially on the ITC claims front, which has been becoming stricter by the day. The Finance Bill 2022 revamped Section 38 and introduced a series of supplier-linked input tax credit rules. Decoding it prescribes how taxpayers can claim ITC in the future, and these ITC restrictions are all linked to a taxpayer’s suppliers’ GST compliance.
The conditions where ITC cannot be claimed include where:
- The supplier is a newly registered business under the GST law up to a prescribed period.
- The supplies are furnished by a supplier whose tax dues are pending for a certain period.
- The supplier’s output tax liability payable exceeds the output tax paid during the said period by a prescribed limit.
- The supplier has claimed more ITC than what was lawfully allowed, determined by a prescribed limit.
- The supplier had utilised ITC from their electronic credit ledger over what was lawfully allowed.
- The supplier belongs to such a class of prescribed persons.
Note that the words ‘certain’, ‘prescribed’, etc. means that the government is yet to specify the periods, monetary limits, and class of persons. The limits will likely get notified only once the Central Board of Indirect Taxes and Customs (CBIC) notifies the revised Section 38.
Other ITC-related changes this year
This year, the revised Section 38 was not the only big change to the ITC claims process. At the beginning of 2022, the government eliminated the concept of provisional ITC. This was done by inserting a new clause (aa) to Section 16(2) of the Central Goods and Services Tax (CGST) Act and by amending CGST Rule 36(4).
Further, Finance Bill 2022 made two changes in the CGST Act to corroborate this change; Section 41 was amended, and Section 43A was omitted. This means that taxpayers can claim input tax credit only to the extent that their suppliers upload invoices and debit notes in their return of outward supplies, and the same must be reflected in the GSTR-2B. Any supplier non-compliance will now result in the recipient taxpayer losing the precious input tax credit.
How do the new ITC restrictions affect taxpayers?
The new ITC amendments in the GST law add to the stringency of the ITC claims process. Most businesses in India frequently deal with non-compliant vendors, i.e. vendors who do not upload invoices on time and require constant reminders. With provisional ITC, businesses had some leeway in the form of a 5% limit over and above the ITC reflected in the GSTR-2B. This leeway doesn’t exist anymore.
So what happens if suppliers do not upload invoices on time? Even if a few suppliers default each month, a business cannot claim all the lawfully ITC due to them as it will not reflect in their GSTR-2B. This leads to the cash portion of the GST liability increasing to that extent, and these unnecessary cash outflows impact working capital.
The other issues taxpayers now have to deal with are the increased efforts in invoice reconciliations, a tighter check on ITC claims to avoid penalties, and increased vendor communication and following up.
How can taxpayers streamline their ITC claims process?
In light of the new ITC amendments, both the ones notified at the beginning of the year and the ones in Finance Bill 2022, which are yet to be notified, taxpayers need to streamline their ITC claims to avoid cash flow leakages.
Here’s how businesses in India can ensure optimal ITC is claimed each month and reduce their efforts on reconciliations and vendor management.
- Businesses should ensure that they only deal with compliant vendors going forward. SaaS platforms offer vendor compliance checks pre-onboarding and regularly to ensure that vendors upload invoices on time. Vendor compliance is the most important factor in effective ITC claims.
- Automate the ITC reconciliation process. Leading GST compliance solutions offer one-click reconciliations and reconciliations that are entirely automated. In the latter case, the tool syncs with the taxpayer’s ERP and the GST portal and frequent reconciliations are carried out. Any missing invoices detected would result in the same being flagged to the user and a reminder being sent out to the vendor.
- Automate the vendor communication process. This function has become even more important in 2022 as the increased dependency on vendors is unprecedented. At the same time, it is not possible to manually track thousands of invoices and send out reminders. Hence, this function must be automated.
- Invest in a GST solution that has vendor payments synced to the ERP. This is important for businesses that frequently deal with vendors who do not upload invoices on time. Withholding of vendor payments cannot be done manually due to the volume of transactions involved; it is hard to track the same at an invoice level. Hence, a good GST solution will ensure vendor payment automation and automatically withhold the payments of non-compliant vendors in cases where they do not upload invoices on time.
Excess ITC claims could result in demand notices and penalties, and sub-optimal ITC could hit cash flows and working capital. Automating tax compliances, especially reconciliations and vendor communication, will ensure 100% accurate ITC claims, which is the need of the hour.
For any clarifications/feedback on the topic, don’t hesitate to contact the writer at firstname.lastname@example.org.
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