Input Tax Credit Review Audit – GST


The GST audit under Section 35 (5) of CGST Act 2017 has not been notified till date. However, the industry and trade needs to carry out an input tax credit review before the last date of filing of September 2018 return [October 20th 2018]. It is understood that there could be a number of errors of understanding, system errors and transactional mistakes in the year 2017-18. The registered persons would have a chance to ensure total reconciliation and proper availment is carried out before this time limit expires. Those who miss this window may have to face disputes and ligation if they were to avail the ITC after this date.

This article provides some insights into the possible coverage in this ITC review providing draft a step wise ITC review list with comments. Some of the common errors in ITC expected has also been provided for ensuring that the ITC review is effective. It also provides a sample reconciliation statement of ITC.

Steps in ITC Review

 

  1. Understand the business: The general background of industry, company, challenges in indirect taxes faced by them, type of vendors and type of customers. This would help in conduct of the
  2. Confirm the existence of adequacy of systems and controls: Internal controls in indirect taxes has not been put in most organisation and change to GST may have further delayed it. Reliance on the normal audits checks may not be adequate due to various reasons. The transactions which may not be reflected in the books of account like stock transfers to different states, Agent/ principal supply, supplies with related parties which are without consideration, reverse charge, etc. are normally not accounted in the financial system in the form of usual inward-outward supplies. These aspects may need confirmation of proper systems to comply and reconcile the liabilities as well as the
  • Review of procurement policy of the organization including imports: The importance of the tax clause to ensure optimisation of the credits and ensuring vendor has paid taxes owed on the supply. Further the knowledge of credits to the procurement team maybe
  1. Invoice Validity: The requirement of payment on taxes only if indicated in the invoice along with specified particulars. Also, confirm that all invoices where credit has been taken are available for verification and preserved
  2. Review the nature of services and goods: The nature of expenses incurred to ascertain GST impact and to assess GST credits: Any goods and services used in furtherance of business are eligible for credit other than those blocked. All major value of inputs, capital goods and services need to be
  3. Review of Sources: The question of procurements made only through registered dealer/ manufacturer/service provider needs to be confirmed. In case of procurement from unregistered dealer, the possibility of credit chain being broken and consequent increase in costs to be

 

 

  • Review the system of claiming credit: The time of supply would be important for availing credit in respect of Inputs, Capital goods and RCM expenses. Verify if the goods and services are actually received and in a verifiable
  • Review the major agreements/ orders: This can be done by review of sample invoices based on which credits claimed to study impact under GST with respect to taxations and
  1. Review of expenses liable for GST under RCM: Most of the RCM payments could also be eligible for credits. If so whether paid and availed to avoid payment of irrecoverable
  2. Studying the nature of books of accounts maintained: The books to capture and identify that ITC has been availed. Review of financial ledgers to ensure that ITC are taken on all eligible heads. There may be a need to have bifurcation of accounts to enable the capture of such
  3. Review of treatment of purchase returns to study the possible impact under GST: The tax paid on purchases returns on GST invoice is equal to credit on inputs.
  • Review the foreign currency payments: To ascertain RCM liability and availment of
  • Review if goods / services at Branches/ Business verticals: Confirm if invoices are addressed properly for goods / services received at locations. Ensure that credit capture system and reconciliation is available in all branches within and outside the State. If expenses incurred at other than branches registered in the State, confirm that an input service distributor registration
  • Review terms of purchase orders vis a vis purchase invoices: Defective invoices can lead to disputes at a later date. They can however be rectified once identified.
  1. Review of rate of taxes: This would be more important for goods or services supplied. It may also be value additive for the vendors if the customer confirms the taxes. This should not be the responsibility of the customer but as on date, it could be.

 

  • Review of method of capitalising the work in progress: This is to examine whether ineligible credits exist or eligible credits are not availed. This should be as per Accounting Standards and GST
  • Review of credit availment mechanism and conditions to be fulfilled for credit: The need for having received the goods or services; the issue of a valid invoice, goods and/or services used in furtherance business. There may be a need to suggest improvement to automatically record the credit which can later be confirmed. This would be important in bringing down the cost of procurement of goods or
  • Review if payments made within stipulated time for taking credit: There is a time limit for payment to vendors within 180- days. If it exceeds, ITC needs to be reversed with interest, however an amendment for without interest reversal has been proposed for amendment in the CGST Bill. On payment to the vendor is made, the credit can be claimed back. System to capture such reversals in recoverable accounts and their periodic nullifying may be
  • Review if discounts agreed and valuation adopted by vendors: Ensure that they are in line with law and do not lead to loss of credits or double taxation
  1. Review of debit notes and credit notes on sampling basis: This is to ascertain the impact on ITC: To confirm that the credit be availed only if receiver/ customer had reversed the
  • Review of credit register: Look for patterns and confirm evidence captured/ filed in order to satisfy the scrutiny by internal / external
  • Review of import documents, job work inward invoices, stock transfer inward invoices, etc. Some of these may not be accounted in the system as they are not financial entries but have an impact on

 

 

  • Review if there are transactions of personal nature: In such cases credit is not available.
  • Review of goods issued free of cost or as samples: At times the value of such FOC supplies may have to be included in the final supply at which time if the credit of such FOC is lost it may not be competitive as credit in between has been lost.
  • Review of credit apportionment in case of supply of taxable and exempted supplies: The capture of credit specific to each and only the common credits being allocated is a preferred way
  • Review of credit availment in case of assets put partially for non-business /non- taxable use: The reversal for personal use needs to be
  • Review of various returns filed under GST such as GSTR 1 and GSTR 3B and identification of differences in ITC if any, between GSTR 3B and GSTR 2A. [Reconciliation to be provided by Auditee]
  • Review of TRAN-1, TRAN-2 filed: This is to be confirmed with what was eligible and if any excess availed to be reversed. If short availed disclosure could be made as last date is over. Court could provide additional
  • Review of disputable credits: These credits could be availed and reversed with intimation to revenue avoid time
  • Review of credit accumulations: Reason to be ascertained and option if any exercised for encashment of the such credits through refund or
  • Review of important ratios: The credit availed and utilised to total GST, ITC/ Total purchases and expenses among
  • Common Errors: Identifying and correcting the errors observed in the above review and also confirming with a list of common errors (provided further) .
  • Identification of Transactions with distinct persons eg. support services by HO to factory situated in different state. If so cross charge of the same is to be looked into.

 

 

  • Identification of Barter activities or transactions which may not reflect in books of accounts. In the same line identification of non-monetary consideration in any exchange transaction, which leads to revision of

 

 Common Errors in ITC

The errors are expected to be mainly centered around vendor compliances impacting ITC, doubtful credits, missed or short credits. Excess or duplicate credits, debit/ credit note adjustments, capital goods credit vis a vis capitalization, reversal for exempt supplies and reverse charge. We examine some of them in more detail hereunder:

1.   Considering ITC balance to payoff liability under reverse charge

 

  • Recipient cannot utilize ITC for discharging RCM liabilities. GST portal also does not allow such adjustment while filing
  • ITC can be claimed in the same month where taxes are paid by the recipient under RCM in end of previous

 

2.   Discharging GST under reverse charge on services u/s 9(3).

 

  • Auditor needs to understand place of supply especially for export or import of services.
  • The old service tax law and the GST Act differ and there are some transaction which no longer attract If paid then refund can be sought as it is within limitation. Illustration: Rent a cab or manpower services which were liable for RCM under earlier tax regime but not notified services under GST regime.

 

3.   ITC could be claimed on the taxes paid under RCM on the GTA services:

 

  • ITC is only restricted for provider of GTA service who pays at 5%. The customer who pays taxes under RCM could avail ITC if

 

4.   Treating export of goods/services as exempted goods/services and not availing eligible credits related to same

 

  • Refund of taxes paid on the goods or services could be availed by the person making the exports even when output GST is not paid on exported goods/exported

 

5.   Non-reversal of ITC in cases where payment is not made to supplier within 180 days from the date of invoice

 

  • Reversal of ITC with interest is required. (recently the amendment for no interest has been made- but retrospective applicability not made )
  • The care to enable re credit on future payment can be

 

6.   Inter-State purchases made from unregistered persons

 

  • Procure goods only from a registered vendor & avail eligible
  • ITC availed on the basis of invoice of registered dealer provided by the unregistered person would not be available. Further availing ITC on the basis of photocopies may be disputed
  • No restriction for availing 100% of ITC on the purchase of capital goods. [50% credit was in earlier central excise regime].

 

7.   Availing ITC on supplies specifically blocked u/s 17.

 

  • Not allowed and if availed - has to be

 

8.   Availing credit when the same is restricted by rate notification

 

  • Where ITC was availed when the conditional of notification restricts. Credit to be reversed with

 

9.   Availing   ITC   merely   on   receipt   of   invoice   without   actual   receipt   of goods/services

 

  • ITC could be availed only on receipt of invoice and goods ( constructive receipts on instruction of purchaser included).

 

10.   Non-reversal of proportionate ITC in respect of exempted supplies, non- business purpose use

 

  • Non-business, non-taxable or exempt supplies not eligible for credit. It would amount to non-compliance of Rule 42 and 43 of the CGST Rules, 2017. supplies, where rate notification restricts availment of ITC (eg restaurant) shall be treated as exempt supplies for the purposes of computation of ITC reversal under Rule 42 & 43 of CGST Rules 2017.

 

11.   Non-availment of ITC on bank charges

 

  • ITC could be availed as there is no specific restriction U/S 17(5)

 

12.   Non-reversal of ITC in respect of goods lost, stolen, destroyed, written off or distributed as gifts/free samples

 

  • Where ITC is availed and then the goods lost, stolen, destroyed, written off or distributed as gifts/free samples, ITC has to be reversed with
  • Written off could mean fully written off and therefore provision may not impact this.
  • Inputs destroyed before putting into the production process would be
  • Inputs sent as samples are covered in this section. Inputs contained in final products would not be

 

13.   Delay in availing ITC

 

  • Avail the ITC on monthly basis and utilize for payment of output liability
  • The absence of proper mechanism/checklist to determine the eligibility of ITC of various purchase/procurement

We provide the format of ITC reconciliation for making the auditor’s job easier. The article could be expanded or customised to the needs of the client depending on industry differences. This is not an in-depth analysis for which a good commentary on GST audit maybe referred in addition to the Background material of the ICAI which is updated till May 2018.

Acknowledgements 

We thank CA. Madhukar N Hiregange for drafting this article and CA. Jatin Harjai for reviewing the same. For any queries, you may connect with CA. Madhukar N Hiregange at idtc@icai.in .

-    Indirect Taxes Committee

 

 

Sample Reconciliation Format - ITC for year 2017-18

 

Sl. No.

Particulars

Total

 

Input Tax Credit as per Books

xx

Less:

 

A.

Credit relating to other registered persons/distinct persons

 

B.

Credit on which input tax credit is not available due to the following:

 

i.

ITC used for transaction which are not a supply as per Schedule III or the definition of supply

 

ii.

ITC on Inward supplies received from composition suppliers

 

iii.

ITC on Goods / services are not used in the course or furtherance of business u/s 17(1)

 

 

iv.

Credit ineligible as the goods/services received are used wholly for effecting exempt supplies (excluding

exports)

 

v.

Credit ineligible u/s 17(5)(a) : On motor vehicles and other conveyances

 

 

vi.

Credit ineligible u/s 17(5)(b)(i) : On food and beverages, outdoor catering, beauty treatment, health

services, cosmetic and plastic surgery

 

vii.

Credit ineligible u/s 17(5)(b)(ii) : On membership of a club, health and fitness centre

 

viii.

Credit ineligible u/s 17(5)(b)(iii) : On rent-a-cab, life insurance and health insurance

 

ix.

Credit ineligible u/s 17(5)(b)(iv) : On travel benefits extended to employees on vacation

 

 

x.

Credit ineligible u/s 17(5)(c) : On works contract services when supplied for construction of an

immovable property

 

 

xi.

Credit ineligible u/s 17(5)(d) : On goods / services received for construction of an immovable property

on own account

 

xii.

Credit ineligible u/s 17(5)(g) : On goods or services or both used for personal consumption;

 

xiii.

Credit ineligible u/s 17(5)(h) : On goods lost, stolen, destroyed;

 

xiv.

Credit ineligible u/s 17(5)(h) : On goods fully written off;

 

xv.

Credit ineligible u/s 17(5)(h) : On goods disposed of by way of gift;

 

xvi.

Credit ineligible u/s 17(5)(h) : On goods disposed of by way of free samples;

 

 

xvii,

Credit ineligible u/s 17(5)(i) : In respect of tax paid in accordance with the provisions of sections 74, 129

and 130;

 

xviii.

Credit not taken as the recipient's GSTIN was not mentioned / mentioned incorrectly

 

xix.

Credit reversed u/s 17 (4) for a banking company / financial institution / non banking financial company

 

xx.

Credit not taken as the place of supply is outside the State

 

C.

Proportionate reversal of Credit u/s 17(2): Reversal for exempt supplies.

 

D.

Credit reversed u/s 16(2) (d) due to non payment in 180 days

 

E.

Credits which will be taken in the subsequent year

 

F.

Credits reversed under protest: This maybe due to doubt or direction of revenue

 

G.

Any other (please specify)

 

 

Adjusted ITC Amount as per financials (in the State)[ sub-total]

xx

Add:

 

A.

Credit u/s 140-143- Transitional

 

B.

Credit available u/s 18 on registration opting out of composition etc.

 

C.

Credit reversed due to 180 days now availed.

 

D.

Credit on purchase of capital assets

 

E.

Credit on prepaid expenses of this year if missed

 

F.

Missed credit from 1st July 2017 till 31st March 2018

 

G.

Adjustments in Valuation Section 15

 

H.

Any other (please specify)

 

 

 Final Adjusted as per financials                                                                                                                      

xx

 

 Amount of ITC as per Annual Return (in a State)                                                                      

xx

 

Difference if any to be analysed

x

 

 

DISCLAIMER

The views expressed in this article are of the author(s). The Institute of Chartered Accountants of India may not necessarily subscribe to the views expressed by the author(s). The information cited in this article has been drawn from various sources. While every effort has been made to keep, the information cited in this article error free, the Institute or any office of the same does not take the responsibility for any typographical or clerical error which may have crept in while compiling the information provided in this article. 

Source: ICAI


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