How The Removal Of 5% Provisional ITC Has Forever Affected Businesses?

It is well known and well established that the GST law allows businesses to claim credit of taxes paid on inputs used in the business. This concept is also called Input Tax Credit or ITC. However, certain conditions need to be met before such a claim can be made by a business.

One of those conditions is that the supplier of inputs should have paid the GST on the invoice (for which ITC is being claimed) as well as filed their GST return.

Why is the ITC claim lost?

Many times suppliers fail to comply with this. Returns are not submitted on time or sometimes they even fail to deposit their GST dues. As a result, the business loses out on credit. The GST law allowed some ‘provisional credit’ i.e. credit that could be claimed on a provisional basis, pending return filing by the vendor/supplier; this was usually allowed as not to exceed 5% of the total ITC claimed.

ITC claims to be restricted from 1st January - no provisional credit allowed

Effective 1st January 2022, businesses can no longer claim this provisional credit. The newly added condition states you can avail ITC if your vendor reports that invoice or debit note in their GSTR-1 or Invoice Furnishing Facility (IFF).

This means they can only claim credit that appears in their GSTR-2B. Form GSTR-2B provides eligible and ineligible Input Tax Credit (ITC) for each month, similar to GSTR-2A but remains constant or unchanged for a period. In other words, whenever a GSTR-2B for a month is accessed on the GST portal, the data in it remains the same without being changed for subsequent changes by their suppliers in later months.

Any excess claims or failure to comply with this condition can make your business liable to penalties or, even worse, the GSTIN of the business may get suspended.

Businesses need to brace themselves

The new law places greater responsibilities on business since provisional credit has now been shelved.

So far, many businesses relied on the 5% ITC buffer while filing their GSTR-3B. They can no longer wait for vendors to upload invoices at their convenience. If vendors fail to upload invoices, businesses are at a high risk of losing money in tax outflows. If vendors lag, the enterprise must bear additional GST in cash until the vendor complies.

Presently, enterprises undertake reconciliations less frequently or wait until the due date to file returns. However, they cannot continue with this frequency after 1st January 2022. It would leave them with less or no time for follow-ups with vendors for missing invoices.

Businesses usually communicate with vendors for GST-related matters ad-hoc or once a quarter. Many depend on conventional phone calls, text messages and emails. However, these are disconnected from the ERP, accounting or tax computing solutions and cannot keep a track of actions. Tracking the status becomes a headache if taxpayers continue using conventional means.

Many businesses hold payments of invoice dues or GST as a popular weapon to push non-compliant vendors. It is currently being done once a quarter or year at the vendor level. Many organisations do not implement vendor grading and management strategies.

Recommended actions via tech-intervention

ITC reconciliations must be more dynamic, real-time, as often as a week or even shorter. The manual route becomes complicated, laborious and time-consuming.

Henceforth, businesses must proactively reach out to non-compliant vendors in real-time and constantly nudge them to report invoices. Moreover, the business must more often hold vendor payments to discipline defaulting vendors. They must hold payments at the invoice level and more frequently, especially for the GST value.

Every business will need a tech-based system or solution to match their purchase invoices more frequently to identify missing ITC. It is economical for companies to switch to cloud-based solutions that also run on artificial intelligence and machine learning. It is necessary to adopt a reliable system for real-time or two-way vendor communication, vendor compliance grading and automatic payment blocking mechanisms.

By following the recommendations, enterprises can smoothly comply without affecting their working capital amid the removal of provisional ITC.

Archit Gupta

Guest Author Archit Gupta is Founder and CEO of Clear (Formerly Cleartax), an online tax filing platform used by over 1 million companies and individuals. Prior to setting up Clear, he worked at Data Domain Inc which was acquired by EMC2.