ITC Complaints: Types & Preventive Measures for Domestic Suppliers

Input Tax Credit (ITC) is a mechanism in the Goods and Service Tax (GST) system context. It is used by businesses to offset their already paid tax on the purchase of goods or services against their tax liability on sales. It helps to prevent the overlapping of taxes at different stages of the supply chain.

How does it work?

Purchase: When a business makes a purchase of goods or services from other businesses, it pays tax on its purchase. This tax is known as Input Tax.

Sales: When a business sells its goods or services to other businesses, it collects tax on their sales. This tax is known as Output Tax.

Offset: Businesses tend to offset their tax liabilities. We can conclude that if the Output tax exceeds the Input tax, the business pays the difference to the tax authorities. If the Input tax is more than the Output tax, the business claims a refund for the excess amount (in certain cases).

Input Tax Credit promotes transparency in the taxation process and ensures that taxes are levied only on the value added at each stage of production and distribution. This prevents the cumulative effect of taxes on a product or service as it moves through the supply chain, leading to a fair and efficient tax system.

GST ITC claims can be complex for both inter-state as well as export transactions. Many issues may arise, which can lead to discrepancies.

In this series, we are going to discuss all the reasons behind ITC disputes, and what preventive steps can be taken to avoid them.

Below are the possible complaints that may occur regarding domestic and export transactions.

Types of Input Tax Credit Complaints in Inter-State Supply:

In Case of Non-Receipt of Goods or Services:

Businesses might face complaints related to non-receipt of goods or services against which they have claimed input tax credit. This could happen if the supplier fails to provide the goods or services as promised, leading to a situation where the tax credit claimed becomes questionable.

Case Scenario:

A manufacturing company, ABC Electronics, orders a batch of raw materials from Supplier XYZ to produce electronic components. ABC Electronics claims an input tax credit (ITC) on the GST paid for the raw materials. However, after payment, Supplier XYZ still needs to deliver the raw materials as promised. This situation raises concerns about the validity of the GST ITC to be claimed by ABC Electronics, as the goods still need to be received even though the tax credit was taken.

When There is Incorrect Documentation:

ITC claimed in GST require proper documentation where all the details should match the invoice and the claim. The GSTIN and other details should be recorded appropriately. Mismatch in the invoice number, GSTIN, tax amount TIN, etc., can lead to disputes regarding the eligibility of the claimed ITC.

Case Scenario:

Retailer X purchases a shipment of consumer goods from Distributor Y. X intends to ITC claim on the GST paid for the purchase. However, when reviewing the invoice from Y, X noticed that the invoice contained incorrect item descriptions and price errors mentioned. The incorrect documentation makes it challenging for X to support its ITC claim, leading to a potential dispute.

Due To Mismatch in GST Return:

The GST returns filed by the supplier and recipient need to be matched with respect to the ITC claim. Mismatch in any details can lead to complaints regarding the availment of the ITC under GST.

Case Scenario:

Manufacturer A buys crafting supplies from B. Both parties are eligible to claim ITC. However, when A reconciles its GST return with the details provided by B, they discover a discrepancy in the invoice number and total tax amount. This mismatch needs to be clarified and raises questions about the accuracy of the ITC claim.

Occurrence of Disallowed Credit:

Specific scenarios under GST law might lead to the blocking of GST ITC. For instance, if a supplier has not filed their GST returns for a specific period, the recipient’s ITC claim for transactions involving that supplier could be blocked, causing complaints and complications.

Case Scenario:

Distributor K sources goods from multiple suppliers for its retail business. One of its key suppliers, H, needs to file GST returns for the last quarter. As a result, K’s attempts to claim ITC for transactions with H are blocked by the GST system. This situation leads to complaints and complications as K cannot avail the GST ITC it is entitled to.

Presence of Excess or Duplicate Claims:

In some cases, businesses might unintentionally claim excess ITC or duplicate ITC for the same transaction. Such discrepancies could lead to disputes during tax assessments or audits.

Case Scenario:

Software Company ABC buys software licenses from Supplier XYZ and claims ITC on the GST paid. However, due to an internal communication error, XYZ’s finance team inadvertently submits ITC claims for the same software licenses twice. This duplicate claim was discovered during an audit, leading to a dispute over the excess ITC claimed.

Due To Fraudulent Activities:

There are cases of fraudulent claims where businesses create fake invoices or manipulate transactions to claim ITC illegally. Regulatory authorities take such cases seriously, and complaints might arise from competitors or other stakeholders.

Case Scenario:

Manufacturer LMN notices that one of its competitors, NGO, is offering products at meager prices. Upon investigation, LMN discovers that the NGO has been creating fake invoices and claiming fraudulent GST ITC to reduce costs. LMN files a complaint with tax authorities against NGOs for engaging in illegal practices.

Need For Reversal of ITC:

Some cases require businesses to reverse the claimed ITC. This happens if the business has violated the terms of claiming ITC, like using the goods for non-business purposes, and disposed of the items once purchased to get the claim. In such cases, the ITC claim needs to be adjusted.

Case Scenario:

Construction Company DEF purchases construction materials for a commercial project and claims ITC. However, a portion of the materials is damaged during transportation and cannot be used for the project. DEF must reverse the ITC claimed on the damaged goods, which requires adjustments in their records.

Eligibility Criteria:

For many businesses and transactions, the goods and services they are dealing in don’t match the eligibility criteria, and therefore, GST ITC cannot be claimed by them. Businesses must understand the eligibility criteria outline and then make a claim. Understanding the eligibility of certain expenses can be quite complex but very important.

Case Scenario:

Furniture Retailer PQR imports specialized chairs for office use and claims ITC on import-related taxes. Tax authorities question the eligibility of GST ITC, arguing that the chairs might need to meet the criteria for business-related use as per the GST laws. PQR must provide evidence to support its claim, leading to a dispute over the interpretation of eligibility.

How to prevent any mismatch while claiming ITC?

1. Valid GSTIN

Ensure that your supplier’s Goods and Services Tax Identification Number (GSTIN) is accurate and valid. You can verify the GSTIN on the GST portal or through other official channels.

2. Comparing Details Accurately

Compare the details on the invoices you receive from your supplier with the details you enter into your records. This includes the supplier’s name, GSTIN, invoice number, date, and the amounts of goods/services.

3. Reconcile GSTRs with E-invoices

GSTR-2A/2B is a read-only form that auto-populates information from your suppliers’ GSTR-1 returns. Regularly reconcile the invoices listed in your GSTR-2A/2B with your invoices received. This helps identify discrepancies and prevents you from claiming GST ITC on ineligible invoices.

4. Valid Tax Amounts

Verify that the tax amounts mentioned on the invoice match the applicable GST rates for the goods/services. Ensure that both Central Goods and Services Tax, State Goods and Services Tax or Integrated Goods and Services Tax components are calculated correctly.

5. Documentation

Keep copies of all invoices and relevant documents systematically. This documentation is essential for proving the eligibility of ITC claims during audits.

6. Timely GST Filling

Ensure your GST returns, particularly GSTR-3B, are filed on time. Delayed filing can lead to mismatch issues and penalties.

7. Communication with Suppliers

Maintain open communication with your suppliers. If you notice any discrepancies or errors in the invoices, inform the supplier and rectify the issue promptly.

8. Internal Matching

Perform regular internal reconciliation of your accounts to identify any discrepancies or errors. This can help catch mistakes early and prevent mismatches when filing returns.

9. Updated ERPs

If you use accounting or ERP software, ensure that it is updated and capable of handling GST calculations accurately. Reputable software often has built-in features for verifying GSTINs and preventing errors.

10. Employee Training

Ensure your accounting and finance team is well-trained in GST rules and procedures. This can help reduce manual errors and improve compliance.

11. Internal Audits

Conduct periodic internal audits and reviews to identify potential issues before they become significant problems.