As per the CGST Act, the input tax in relation to a registered person is central tax, state tax, integrated tax or Union Territory tax charged on purchasing goods or services or both. The ITC also covers integrated tax charged on import of goods and GST paid on a reverse charge basis. In simple terms, when paying GST on sales, you can reduce the tax that you have already paid on purchases and pay the balance amount.

ITC can be claimed by a person registered under GST only if he fulfils ALL the conditions as prescribed:

• The dealer should have a tax invoice
• The said goods/services have been received.
• The recipient has filed the GSTR-3B.
• The tax charged in the invoice has been paid to the government.

Also, when goods are received in instalments, ITC can be claimed only when the last lot is received. No ITC will be allowed if depreciation has been claimed on the tax component of a capital good.

The recipient must pay the invoice amount within 180 days from the date of invoice. If the recipient fails to pay so, the amount taken as ITC should be reversed.

The time limit to claim ITC against an invoice or debit note raised in a particular financial year is earlier than the below:

• Due date of filing GST returns for September of next financial year OR
• Date of filing the annual returns relevant for that financial year

The following are the various sections and rules governing the ITC:

• Section 16 of CGST Act: Explains eligibility and conditions for claiming Input Tax Credit (ITC).
• Section 17 of CGST Act: Elaborates about Apportionment of credit and blocked credits.
• CGST Rule 36(4): Explain provisional ITC and calculation of the same.
• CGST Rule 42: Reversal of ITC on inputs or input services.
• CGST Rule 43: Reversal of ITC on capital goods.
• CGST Rule 86A: Conditions for utilising ITC.
• CGST Rule 86B: Explain the restriction of usage of ITC.
• CGST Rule 88A: Contains order of utilisation of ITC.

Taxpayers will be able to claim ITC only if the invoice is present as a part of their GSTR-2B. Hence, taxpayers need to do a reconciliation to identify if ITC as per their purchase register and GSTR-2B data is matching.

Up to July 2020, taxpayers were comparing the GSTR-2A with the purchase register. Due to the introduction of static return in GSTR-2B, the monthly reconciliation has moved from GSTR-2A to GSTR-2B. However, for the yearly reconciliation, GSTR-2A, which is a dynamic return, is preferred. But as an exception, one must still refer to GSTR-2A for TDS and TCS credits.

The GST returns are filed either on a monthly or quarterly basis. Finally, annual returns must be filed after the financial year gets over, but before the 31st December of subsequent FY. This filing would need consolidation of the data reported over the FY. To ensure the correctness of the declaration made and to avoid duplications, taxpayers must reconcile the data, then consolidate the values and make the declaration.

The following are the few advantages of using AI-based tools for automated ITC reconciliation:

• Import of data can be given from any source such as ERP, Excel, bill books, etc.
• Minimises the manual efforts and time
• Avoids data transcription errors
• Ability to handle a massive amount of data
• Allows deep reporting and provides valuable insights
• It helps in claiming only eligible ITC as the tool is updated whenever there is a change in law

• GSTR-3B vs GSTR-1 tax comparison report: Enables clients to understand the difference in the tax liability, which helps clients avoid inconsistencies between these two returns and avoid penalty/notice from GSTN.
• GSTR-3B vs GSTR-2A and GSTR-2B ITC comparison report: Identifies excess ITC claims for each month and ensures that the taxpayers are prepared for any notice that comes their way.
• Monthly Tax and ITC summary report: Gives month-on-month view for the top management on the tax paid, and ITC was taken by each of the GSTINs.

The automatic vendor communication tool allows vendor communications and seamlessly tracks vendor communication by having all communication channels packed into one. It sends automated communication to vendors and reduces follow-up efforts to the least. It helps in identifying non-compliant vendors and empower them to comply. Also, it nudges quarterly vendors to use the IFF.

The two-way integration tool pulls the purchase register from the ERP, GSTR-2A and GSTR-2B. One can schedule the auto-reconciliations and sync payment decisions for each invoice back into the ERP automatically. Also, these features can be used for taking actions in bulk.

• Creating an indemnification clause: Before making a supply, as part of the supply agreement, a clause can be inserted where the supplier will be required to indemnify the recipient in the event the supplier fails to carry out the necessary compliance requirements, resulting in a loss of credit to the recipient.
• Compliance software: A software or application can be put in place, containing relevant details for every vendor, which helps with compliance by keeping track of the invoices, showing return-filing status, sending out due-date reminders, etc.
• Incentive system: An incentive system for the vendor could be developed where he is encouraged to file his returns on time and pass on the necessary credit. However, this could result in an increased cost to the recipient.
• Boycotting defaulting suppliers: The suppliers who commit such compliance defaults repeatedly could be boycotted either by reducing orders placed with them or refusing to deal with them altogether. However, this option could hamper business relationships.