OPINION: GST Input Tax Credit changes from January 1 – Things to ask your vendor, how to protect your ITC and more

The new year 2022 is going to bring a significant change in the manner of availing Input Tax Credit (ITC) by the taxpayers under the Goods and Services Tax Act. The additional condition to avail ITC by the recipient of goods/services introduced by the Finance Act, 2021 has been made effective from January 1, 2022.

With the upcoming change, ITC on an invoice/debit note can be availed by a recipient only when details of such invoice/debit note have been furnished by the supplier in his outward supplies (GSTR-1) and such details have been communicated to the recipient of such invoice in Form GSTR-2B.

Basically, a buyer will not get credit for the tax paid if the supplier does not upload the invoice and file returns on the GST portal in a timely manner.

Henceforth, the taxpayer will not get the benefit of availing 5% provisional ITC as allowed under aforesaid rule.

Implications of the change on businesses

One of the major rigours of the above amendment is that it will increase the dependency of recipients on their suppliers for availing any ITC on their supplies.

Unless the suppliers report their supplies over the GST portal aptly and the same is visible in their auto drafted GSTR-2B, the ITC on such supplies will not be available to the recipient even if other conditions for availing ITC have been duly satisfied.

This brings in dual responsibility on the taxpayers, one to ensure correctness of their own compliances and second to also ensure correct compliances by their suppliers. And if they don’t do the same, they will be the one who will lose their legitimate ITC due to the fault of their suppliers.

How can businesses protect their ITC now? Vendor agreements.

With such draconian provisions being brought in GST, it is imperative for the businesses to safeguard themselves by introducing such stringent and unwavering clauses in their vendor agreements which will protect them from any loss incurred by them due to failure on part of the supplier to upload invoices or incorrect uploading of invoices of supplies made to recipient under GSTR-1 or due to any other technical flaw and entitle them to offset or recover the same from such defaulting suppliers.

Civil suits in case of disagreements

Unless stringent clauses are incorporated in the vendor agreements, it will be difficult for the recipients to claim any remedy under GST law in case any such loss is incurred by them due to non-compliance of the supplies.

Therefore, the last legal recourse that may be available to them will be to file civil suits for recovery which itself is a long-drawn process.

Improving in-house processes will be the key to ensure ITC is not lost

In order to avoid any such complexities, businesses should proactively build in-house processes for the relevant stakeholders such as accounts payable team, tax team, finance team etc. to ensure legitimate ITC is not lost.

For instance, accounts payable team should ensure that payment for any invoice is not made unless the same is available on the GST portal. Likewise, the tax team should ensure that no ITC is taken on any invoice unless the same is appearing on the GST portal as this may result in denial of ITC later.

Other practical solutions to make sure businesses don’t lose ITC

Time to time reconciliations from the data available on portal before taking ITC, rigorous follow up with vendors for timely reporting of their invoices, email communications with the suppliers in case of non-reporting or misreporting, holding payments of non-compliant vendors, etc. are some of the practical solutions which can be implemented by the businesses at their end to ensure legitimate ITC without affecting cash flow of the company.

Concluding remarks

As a closing remark, it won’t be improper to state that having such restrictive provisions runs absolutely contrary to the intention behind introduction of the GST regime which was to eliminate the cascading impact of taxes that existed under the erstwhile regime and to allow free movement of credit.

There is no denial that the government must combat bogus invoicing but while doing so it should not harass bonafide taxpayers by increasing compliance burden on them.

Note: This is an opinion piece by CA Tushar Aggarwal, Founder Partner Tattvam Advisors & CA Geetika Shrivastava, Executive Partner Tattvam Advisors.

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