Auto-ITC Reconciliation process - a must need for a growing business

Based on the purchase made in a month, GST registered taxpayers in India (ex. registered companies) are eligible to claim rightful input tax credit (ITC) from the Government (Tax authority) by filling a monthly or quarterly GST return (GSTR 3B). The input tax credit claimed by the taxpayer is usually offset with the output tax liability of the taxpayer to determine the final tax liability to be paid to the Government in cash or credit or tax refund to be recovered from the Government depending on the case.

Claiming the right input tax credit based on the purchases made in the month is a very crucial activity as it directly impacts the bottom line of the company. It is necessary to claim input tax credit only for those purchases which are eligible for input tax credit & which are for furtherance of the business as per GST regulations laid down the Government. Claiming incorrect input tax credit can lead to severe repercussions for the taxpayer in terms of penalties, high interest & other legal disputes.

Every month, companies need to reconcile their purchase register data available in the ERP or accounting platform with the vendor invoice data available on the tax authority portal (GST portal in case of India) to determine the rightful input tax credit to be claimed in the filling of their GSTR 3B return. Complexity in reconciliation rises when count of purchase invoice is significant & there are considerable number of small or mid-size vendors who might have not have adequate measures to follow required GST compliances. Hence, after doing an in-depth reconciliation activity of the vendor data downloaded from the GST portal and the purchase register, the taxpayer needs to duly inform the vendor for correcting their invoices on the GST portal if a discrepancy is found. Also, there is a possibility that the internal team of the taxpayer might have made mistake while booking the purchase invoice in the accounting platform or ERP leading to more ITC reconciliation issues.

Due to incomplete ITC reconciliation activity, many times taxpayers need to carry forward claiming of the input tax credit of some of their purchases to the next month or return period. Hence, while doing monthly reconciliation activity of the purchase register the taxpayer needs to consider any previous period purchase invoices as well which are eligible for claiming input tax credit but are yet to be claimed. Also, due to incorrect data punching either by the vendor or the taxpayer (buyer) in their IT systems, it becomes quite difficult to reconcile the invoices. For example, the vendor document number & document date which are primary fields for doing the ITC reconciliation are many times entered incorrectly. We have observed examples where alphabet “I” has been captured as numerical “1” or instead of capturing the complete document number only leading few digits of the document number have been captured while doing purchase booking. As many companies have multiple GST registrations (GSTINs), there can be situations where vendor or internal team of taxpayer has booked the invoice against an incorrect GST registration number (GSTIN) than the GSTIN where goods or services were procured, such cross-registration postings need to be reconciled at PAN (country) level to determine such issues.

Reconciling input tax credit by any mid-size or large-size company is not as simple & straight-forward as it seems. It requires a very detailed & comprehensive process to make sure that all the input tax credit is claimed correctly. Use of apt technology driven solution can automate the input tax credit reconciliation process seamlessly.

Even after having a comprehensive input tax credit reconciliation process, it is important to make sure that vendors are following all the required GST regulations thoroughly. One of the ways to enable GST compliance in your vendor network is to do proactive communication where vendors are informed about the discrepancies which have been observed in their GST data uploaded to the GST authorities. Doing such vendor communication in an automated manner becomes quite pertinent as any mid to large size companies might have hundreds or thousands of vendors. Hence, the chosen technology solution should have the feature to auto notify ITC reconciliation discrepancies to required vendors.

Another way to induce more GST compliance discipline among the vendor network is to link their payment release process with the GST data reconciliation results & other GST compliance factors which vendor has to mandatory follow. If any vendor invoice data is found to be having a discrepancy in the ITC reconciliation activity, then, the buyer can put a block on the payment of the complete invoice amount or on the payment of the GST portion of the invoice amount to the vendor. The payment restriction or blocking will force vendor to follow GST regulations religiously. To receive timely and full payment on the goods or services provided by them, vendor will be required to follow all the GST compliance regulations. This will help the buyer to receive full input tax credit on their eligible purchases.

Companies can use ITC reconciliation result of the vendor invoice as a major matrix to decide on vendor payment blocking, though, they can also utilize other factors too in vendor payment blocking matrix like GSTIN status of the vendor, GST return filling status of the vendor, e-Invoice applicability of the vendor, MSME status, etc. Such an ITC reconciliation activity can be done on daily basis using the right technology-based solution in an automated fashion.

Hence, ITC reconciliation solution should be able to automatically block the payment of the vendor invoice, which is not compliant, should be able to communicate to the vendor on such discrepancy and also, should also be able to automatically unblock the pending payment when vendor corrects their invoice & a matched result is received by the taxpayer. Moreover, such solution should also provide an alternative feature to unblock the vendor payment in case of exceptional scenarios or urgencies.

With the use of right technology-based solution, ITC reconciliation activity can be fully automated & can be scheduled to happen on daily basis making ITC leakages & penalties a never-to-happen scenario for the taxpayer.