All about the adjustment of Input Tax Credit under GST

Vaibhav Rathi

30 Mar, 2024

Introduction

An annual return is required to be filed by all registered taxpayers under GST. The annual return has to be filed in Form GSTR-9. Before filing the annual return, it is mandatory to file GSTR-1 and GSTR-3B. The data in GSTR-1 and GSTR-3B is compiled in the annual return. The data entered in GSTR-1 or GSTR 3B cannot be changed, even if the taxpayer identifies that some data entered needs to be corrected. The form’s purpose is only the aggregation of data and not rectification. The books of accounts of an entity should be in conformation with the returns filed. This is done by way of reconciliation.

Requirement for reconciliation of returns with the books of accounts

1. To avoid missing out on claiming Input Tax Credit – Not recording or omitting to record invoices received by organisations leads to loss of Input Tax Credit and excess payment of taxes. A reconciliation process helps to ensure that all available Input Tax Credit is availed.
2. Ensuring solid internal control -The suppliers’ returns should match the books of accounts, reflecting solid internal control within the organisation. Timely reconciliation ensures the correction of mismatches in the books of accounts of the taxpayer.
3. As a part of the audit Process – It is easy for an auditor to match the inward supplies stated in the books of accounts along with in GSTR-2B or GSTR-2A and ask the taxpayer to reconcile if there is any mismatch. Therefore, the taxpayer should reconcile the same monthly and make the data available for audit.
4. To avoid notices from the Tax Department – Any mismatch in returns may lead to the issue of notice from the Tax Department which may lead to the payment of penalties. Monthly reconciliation and appropriate action on the data mismatch are necessary to avoid penalties.

What action should be taken in case of ‘Excess or Less’ Credit in GSTR-2B or GSTR-2A compared to GSTR-3B?

It is essential to reconcile the GSTR-2B, GSTR-2A, and GSTR-3B returns under the GST Law¹. A taxpayer can claim Input Tax Credit on a particular invoice only if that invoice has been recorded in GSTR-2B or GSTR-2A. The matching concept assists the Department in verifying whether all the transactions which occurred in a particular period have been correctly recorded and posted in the summary return GSTR-3B. The action points in case of mismatches are the following:

Note: In the above two cases, the difference between Input Tax Credit (ITC) details from GSTR-2A and GSTR-3B is explained in GSTR-9 under the following:

1. Table 8E: Input Tax Credit available but not availed
2. Table 8F: Input Tax Credit available but ineligible

What should be done if the credit as per the GSTR-2B/3B does not match the books of accounts?

In such a situation, the taxpayer has to perform the following two reconciliations:

A reconciliation between GSTR-2B, 2A and the books of accounts

Dynamic data is required for this reconciliation. Every time a vendor files GSTR-1 or makes any amendment, the data changes and reconciliation must be done.

Step 1: Identification of the invoices recorded only in the books of accounts and not on the GST Portal (GSTR-2A) and the invoices accessible on the portal that is in GSTR-2A and not recorded in books.

Step 2: This invoice mismatch happens due to the following reasons:

1. The supplier failed to upload invoice details in GSTR-1, but the recipient has recorded it in his books of accounts and claimed Input Tax Credit in GSTR-3B in the later month when the supplier uploads accounts.
2. Duplication of the Input Tax Credit claim by the recipient in their books of accounts.
3. The supplier failed to file GSTR-1 or the wrong GSTIN while filing GSTR-1.
4. Due to a timing difference in the recording of an invoice.

Step 3: Take action on such mismatches as mentioned in the Table above.

A reconciliation of GSTR-3B and books of accounts

Static data is required for this reconciliation, as the organisation must prepare and record it.

Step 1: Check if all the GST challans paid by the organisation are recorded correctly in the respective payables ledger.

Step 2: Match Input Tax Credit claimed under GSTR-3B with that in the books of accounts. Pass an adjustment entry in case of a mismatch.

Step 3: GST output claimed in GSTR-3B must match that recorded in the books of accounts. Pass an adjustment entry in case of a mismatch. 

Step 4:The Electronic Credit Ledger must match the Trial Balance.

Step 5: Any errors in GSTR-3B must be rectified in the subsequent month’s return.

Conclusion

At last, the taxpayer must correctly record all transactions in Form GSTR-1 or GSTR 3B. Otherwise, the taxpayer will have to rectify the books of accounts. Rectification is done to avoid missing out on claiming an input tax credit, ensuring solid internal control and avoiding notices from the Tax Department.

FAQs

Read our Article:What is the process of matching ITC (Input Tax Credit) under GST?

1. https://services.gst.gov.in/services/gstlaw/gstlawlist