ITC Reconciliation: The Role of Automation and Future Trends

Goods and Service Tax regime brought with it a systematic process where buyers could claim credit for the tax paid to sellers by way of ITC. This system encourages compliance, as buyers can only claim Input Tax Credit (ITC) if the seller has duly deposited the tax. While this process sounds ideal in theory, the reality is far from perfect. The various complexities of the GST law and numerous compliance requirements, can lead to mismatches in ITC claims. Also, errors in filing, tax evasion, and negligence further contribute to these mismatches. When such discrepancies are there, ITC reconciliation becomes necessary, adding an additional layer of work for both buyers and sellers.

In this blog, let’s explore the various reasons behind ITC mismatches, the ITC reconciliation process, and discuss the common challenges and issues faced during reconciliation.

Common Reasons for ITC Mismatch

Input Tax Credit (ITC) mismatch is a common issue which buyers face when filing their GST returns. It usually occurs due to discrepancies in the GST return filings by either the supplier or the buyer. Hence, understanding these root causes can help in smooth reconciliation. Below are the common reasons for ITC mismatch:

1. Supplier’s Default

The accuracy of ITC claims by the buyer is highly dependent on the correctness of the data provided by the supplier. Supplier-related defaults that can cause ITC mismatches include:

i. Supplier Has Not Filed GSTR-1 or Invoice Furnishing Facility (IFF)

If the supplier fails to file GSTR-1 or Invoice Furnishing Facility (IFF), the data will not appear in the buyer’s GSTR-2A or GSTR-2B. Consequently, the buyer cannot claim ITC for those transactions, leading to a mismatch.

ii. Supplier Filed Returns but Made Mistakes

Even when the supplier files their GST returns, ITC mismatch can occur due to error in filing those returns. Common mistakes include:

• Incorrect Classification of Invoices (B2C vs. B2B): Suppliers might mistakenly upload invoices under the Business-to-Consumer (B2C) instead of Business-to-Business (B2B). ITC corresponding to B2C invoice will not reflect in buyer’s eligible ITC resulting in a mismatch.
• Wrong GSTIN: If the supplier inputs incorrect GST Identification Number (GSTIN) of the buyer, ITC details will not reflect in the buyer’s GSTR-2A/2B.
• Omitted or Missed Invoices: Suppliers may fail to upload certain invoices mistakenly. As a result, ITC mismatch will occur as these missing invoices will not reflect in buyer’s GSTR-2A/2B.

2. Errors in Preparing and Filing Returns by Buyer

Mistakes in the buyer’s GST return filings can also lead to ITC mismatches. Common mistakes include:

a. Filing Returns Based on auto-populated data Without Review

Buyers often rely on the ITC available in GSTR-2A or GSTR-2B, which is automatically populated in their GSTR-3B. However, this auto-populated data includes a mix of eligible credit, blocked credit, and ineligible credit, which they should carefully review and bifurcate. Additionally, it does not account for ITC related to reverse charge mechanism (RCM) or imports. Therefore, filing returns solely based on this auto-populated data can result in ITC mismatches and a need for reconciliation later on.

b. Fake ITC Claim

In some instances, ITC mismatches arise due to fraudulent activities where buyers deliberately claim ITC for non-existent or incorrect invoices. Common examples creating fake invoices, using fictitious suppliers, inflating invoice values or making duplicate claims etc.

Why is ITC Reconciliation Necessary?

Businesses must perform ITC reconciliation for the following reasons:

1. Tracking Missing ITC

ITC reconciliation helps you actively track any ITC that may have been missed due to errors or omissions. By comparing your records with the data in GSTR-2A and GSTR-2B, you can ensure that you claim all eligible credits.

2. Minimize the Risk of GST Notices

Mismatches between the ITC claim and the supplier’s data can trigger GST notices. However, regular reconciliation reduces the chances of such discrepancies and avoids unwanted scrutiny and litigations.

3. Avoid Interest and Penalties

Incorrect ITC claims can result in interest charges and penalties. However, thorough reconciliation helps prevent errors in ITC claim and saves businesses from unnecessary financial liabilities.

4. Identify Compliant and Non-Compliant Vendors

Reconciliation allows you to monitor which vendors consistently comply with GST filing requirements. By identifying non-compliant vendors, you can take corrective actions, such as following up for timely tax deposits and return filing. Also, it helps you reconsider your relationship with such vendors to avoid future complications.

5. Enhance Working Capital Management

Proper ITC reconciliation enables you to claim all the eligible ITC, thereby optimizing your working capital. By avoiding cash flow disruptions caused by incorrect ITC claims, you can maintain a healthier financial position for your business.

Also read: Working Capital Management Under GST: Strategies for CFOs

Process of ITC reconciliation

In order to understand the process of ITC reconciliation, we must first know how data flows in various GST returns

The process of ITC reconciliation ensures that your Input Tax Credit (ITC) claims are accurate and in line with the data submitted by your suppliers. Here’s a step-by-step guide:

1. Collect all purchase invoices for the relevant period. Alternatively, extract the purchase register from your accounting software. Also, ensure that it includes the supplier’s GSTIN, invoice number, date, taxable value, and GST amount.

2. Log in to the GST portal and download the GSTR-2B statement for the corresponding period. This statement contains the invoices uploaded by your suppliers.

3. Match the invoices from your records with the GSTR-2B details. This can be done manually, using Excel formulas, or with automated software for analysis and reconciliation.

4. Next, check for matching details such as GSTIN, invoice number, date, and amount. Note any discrepancies, such as missing invoices, incorrect GSTINs, or differences in amounts.

5. Identify mismatches and discrepancies such as:

• Invoices not appearing in GSTR-2B: This could happen if the supplier has not uploaded the invoice or has filed their return late.
• Incorrect details in GSTR-2B: This happens when supplier has wrongly entered the invoice number, amount or GSTIN of the buyer.

6. Next step is to contact your suppliers and request them to resolve the discrepancies by amending their GSTR-1 return.

7. Follow up with suppliers to ensure they make the necessary corrections in subsequent returns. If unresolved, consider escalating the issue or withholding payments.

8. Review the auto-populated ITC in GSTR-2B and separate the ineligible ITC, such as blocked credits. Also, include ITC not reflected in GSTR-2B such as tax paid under the Reverse Charge Mechanism (RCM) or on imports. Subsequently amend your GSTR-3B return based on the reconciliation.

Challenges in manual ITC reconciliation

ITC reconciliation is a critical yet challenging task for businesses. The process can become even more complicated, when there are large volumes of data. Here are the major challenges businesses may face in manual ITC reconciliation:

1. Handling Large Volumes of Data: For large organizations with numerous invoices and multiple suppliers, manually reconciling ITC can be overwhelming. Matching individual invoices with the GSTR-2A or GSTR-2B data can be time-consuming and prone to human error.

2. Complexities with Multi-GSTIN Entities: For organizations operating in multiple states with different GSTINs, manual reconciliation becomes highly complicated. Coordinating data across various locations and managing multiple reconciliations can be a significant challenge.

3. Managing Supplier Follow-Ups: Effective ITC reconciliation often requires following up with suppliers to correct errors or discrepancies. However, manually tracking all these follow-ups can be cumbersome and time-consuming for businesses.

4. Difficulty in Handling Amendments: When suppliers make amendments to their returns, manually tracking these changes and updating the ITC claims can be challenging.

5. Resource Intensive: Manual ITC reconciliation demands significant human resources, both in terms of time and expertise. As a result, businesses may need to divert resources from other critical operations for this single task.

Role of automated GST software in smooth ITC reconciliation

Automation tools help ease the ITC reconciliation process by addressing many of the challenges associated with manual reconciliation. The following features of GST automation tools such as GSTrobo®  make the ITC reconciliation process efficient and swift.

1. GST software can generate comprehensive gap analysis reports, quickly identifying discrepancies between ITC claims and GSTR-2A/GSTR-2B data.

2. Bulk vendor communication features allow businesses to simultaneously reach multiple vendors, send reminders, request missing invoices, and follow up on corrections.

3. Inter-PAN reconciliation capabilities help in performing cross-GSTIN reconciliations. Such features are useful for organizations operating in multiple states with several GSTINs.

4. Custom logics and advanced algorithms enable specific rules and tolerances for matching invoices. This significantly reduces manual effort and improves match rates.

5. Detailed reporting features provide vendor-wise, invoice-wise, and PAN-level reports, offering a clear overview of ITC reconciliation status.

6. Another critical feature of automation tools is the ability to check the GSTIN status of vendors in bulk. This feature ensures that all suppliers are compliant with GST regulations.

Inadequate ITC reconciliation can trigger penalties, tax notices, and legal consequences for businesses. However, automation tools can enhance the ITC reconciliation process with their unique and advanced features, making it faster and more reliable. Also, this allows businesses to focus on their core operations, saving costs and resources that would otherwise be spent on manual reconciliation processes.