ITC Disputes: All Types and Repercussions

ITC Disputes: All Types and Repercussions

In 2017, when The GST Act was introduced in India, it aimed at streamlining the indirect tax structure and a seamless flow of credits across the supply chain. However, with the increasing complexity of various laws and procedures, multiple disputes started to arise. The complex nature of transactions and varying interpretations of laws have increased conflicts.

Input Tax Credit (ITC), an integral part of the GST system, has accompanied various disputes. All businesses have succeeded in misusing the benefits the government intends to provide. As rightly put, ‘Where there is a will, there is a way’; these ITC disputes also have consequences. But before jumping into the conflicts, let’s understand ITC.

Table of Contents

    Input Tax Credit (ITC) explained

    Input Tax Credit is a significant feature of the GST framework. It allows registered businesses to claim credit for the taxes paid on their purchases and expenses related to goods and services used for business purposes. This credit can be utilized to reduce the tax liability on the sales made by the business. ITC helps eliminate cascading effects and ensures that companies are not taxed twice.

    Who can claim ITC?

    • All registered persons except the ones who are paying tax under the composition scheme can avail of ITC.
    • The person should have a valid tax invoice.
    • The person should have received the said goods/services.
    • The person should be a regular return filer.
    • If a person applies for GST registration within 30 days of becoming liable for it, he can claim ITC. He can claim Input Tax Credit for goods they already have in stock as well as those included in partially or fully finished products they had before becoming taxed.

    On what can ITC be claimed?

    • ITC can be availed on both goods and services except those exempted.
    • ITC can be availed on capital goods.

    Note: From 1st January 2022, ITC claims will be allowed only if it appears in GSTR-2B. So, the taxpayers can no longer claim 5% provisional ITC under the CGST Rule 36(4) and ensure every ITC value claimed was reflected in GSTR-2B.

    On what can ITC not be claimed?

    • Motor Vehicles and conveyance
    • Repair & Maintenance
    • Life Insurance & Health Insurance
    • Food and Beverages
    • Beauty treatments & Plastic Surgery
    • Club memberships – health & fitness
    • Composition Scheme
    • Goods are given as gifts/free samples
    • Non-residents
    • Goods lost/destroyed/stolen
    • Restaurants
    • Advance Payments
    • Hospital Expense
    • Gardening Expense
    • Lease rent for the pre-operative period

    Causes of ITC Disputes

    1. Mismatched/Missing Invoice:

    In the context of the Goods and Services Tax (GST) system, businesses are required to maintain proper invoices for the supply of goods and services. When a supplier provides goods/services to a recipient, they issue an invoice detailing the transaction’s specifics, including the GST charged. The recipient uses this invoice to claim Input Tax Credit (ITC), a mechanism that allows businesses to set off the GST they paid on purchases against the GST they collect on sales.

    However, if there’s a discrepancy or mismatch between the invoice details provided by the supplier and the recipient, it can lead to disputes regarding the validity of the ITC claim. The GST authorities need accurate information to ensure the claimed ITC is genuine. If the details on the supplier’s invoice and the recipient’s records do not match, the ITC claim might be denied.

    2. Eligibility Criteria:

    Not all purchases are eligible for claiming Input Tax Credit. There are specific criteria and restrictions outlined in the GST laws. For instance, ITC cannot be claimed for goods or services used for personal purposes, employee benefits, or for making exempt supplies. A taxpayer trying to claim ITC for purchases not meeting the eligibility criteria can lead to disputes with the tax authorities. The complexity of these eligibility criteria and exemptions can sometimes result in confusion. Businesses might unintentionally claim ITC for ineligible purchases, leading to disputes during tax assessments.

    3. Missing the deadline in filing:

    Under the GST regime, businesses are required to file their GST returns within specific timeframes. These returns provide details of the transactions made during a specific period, and the ITC claimed. If a business fails to file its GST return within the prescribed deadline, it might lose the opportunity to claim the ITC for that period. This deadline adherence is crucial for accurate reporting and claiming of ITC. Missing the filing deadline can lead to a decline in the ITC claim for that particular period, affecting the business’s cash flow and financial planning.

    4. Non-Compliance:

    Compliance with the GST regulations is essential for a smooth ITC claim process. If errors or discrepancies in the information provided on invoices or in the GST returns can result in disputes. Examples of non-compliance include:

    • Incorrect GSTIN (Goods and Services Tax Identification Number) on invoices.
    • Incorrect reporting of transactions.
    • Failing to provide required documentation.

    Non-compliance can trigger audits and investigations by the tax authorities, potentially leading to penalties or disallowance of ITC claims.

    Repercussions of ITC Disputes

    1. Increased Liability:

    When a business claims Input Tax Credit (ITC) for GST paid on its purchases, it effectively reduces the amount of GST it needs to remit to the government. However, suppose the tax authorities find that some or all of the claimed ITC is invalid due to mismatched invoices or ineligible purchases. In that case, the business will have to pay back the disallowed amount. This increases the business’s tax liability on its output supplies, which are the goods or services it sells to its customers. The additional liability can impact the business’s finances and cash flow, as it has to pay more tax than initially anticipated.

    2. Interest and Penalties:

    Disputes or non-compliance related to ITC claims can result in financial consequences beyond the disallowed credit. The GST laws often stipulate that businesses may be subject to interest and penalties for non-compliance. Interest is usually charged on the outstanding tax amount that should have been paid, and penalties can vary based on the nature & severity of the violation. These additional financial burdens can significantly impact a business’s bottom line and financial stability.

    3. Reconciliation and Investigations:

    Resolving ITC disputes involves a detailed reconciliation process. This means the business needs to meticulously review its records, invoices, and transactions to identify discrepancies or errors that led to the dispute. Additionally, the business may need extensive communication and correspondence with the tax authorities to explain and justify its ITC claims. This process can be time-consuming and resource-intensive, diverting the business’s attention and resources from its core operations.

    4. Reputational Risk:

    Frequent disputes and non-compliance with GST regulations can negatively affect a business’s reputation. Customers, suppliers, and other stakeholders may perceive a business that frequently faces disputes as less reliable or trustworthy. Such a reputation can affect business relationships, customer loyalty, and overall credibility in the market. Reputational damage can have long-term effects on a business’s growth and success.

    In the End…

    The input Tax Credit (ITC) is an essential tool for businesses to use in order to reduce their tax burden and promote transparency in the GST system. It enables businesses to claim tax credits for taxes paid on purchases, which helps offset the taxes they must pay on sales.

    However, disagreements or disputes over ITC claims can sometimes arise, posing significant challenges for businesses. These disagreements can have a negative impact on their finances and reputation. To avoid these issues, businesses should keep accurate and detailed records of their transactions, strictly adhere to GST regulations, and seek expert advice from GSTrobo, which automates your GST compliance process and optimizes your Taxes while alerting you when necessary.

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