Why this is a welcome step for MSMEs?

Earlier the government has introduced rule 36(4) which says that a taxpayer can claim ITC of only those invoices which are appearing in 2A. A variation of only 10% is allowed. This rule was inoperative for the period from February 2020 to August 2020, but now it is operative.

By the introduction of this rule 36(4), the quarterly filers of GSTR-1 are facing a unique problem. Let’s understand this through an example.

The invoice appears in GSTR-2A only after counterparty files GSTR-1. The quarterly filer files GSTR-1 quarterly. The invoice of this taxpayers appears in GSTR-2A of the counterparty once every quarter. Say if the invoice date is of April 2020 and he is filing the quarterly return on 28th July 2020, his invoice will appear in the GSTR-2A of the counterparty on 28th July 2020. By then the counterparty must have already filed its monthly return GSTR-3B for June month.

This creates a situation that a person purchasing from a quarterly filer can claim ITC credit after a long period which can extend up to 4 months.

This provision alone has created a great hardship on the quarterly filers. The MSMEs who are supplying to large companies are getting continuous requests to file the GSTR-1 monthly.

But the taxpayer cannot change the option to monthly return filing in a mid of the year. This created a situation where the large companies started to avoid doing business with such taxpayers who are filing their return quarterly.

By the introduction of this new due date, quarterly filers get a marginal relief. The period of delay of a maximum of 4 months is now reduced to 3 months.

But this still does not solve the problem completely. Unless the quarterly filers get to change the option of filing GSTR-1 from quarterly to monthly in the mid of the year, the problem cannot be completely solved.

The post Why due date for filing quarterly GSTR-1 is changed first appeared on ITC Reconciliation, GSTR 2A Reconciliation - Digitax Automation.

This rule is one of the most complicated rules to apply in practical circumstances. Let’s discuss what this rule is all about.

In layman’s language, rule 36(4) says that the input tax credit of regular invoices availed in a particular month cannot exceed 110% of the value of invoices matched in GSTR-2A.

Further, as per the circular, an additional condition is also specified. It says that the ITC from the suppliers who have filed their GSTR-1 within the due date will be eligible for availment in the same month. If supplier files GSTR-1 late, then that invoice will become eligible for availment only in next months.

Now, the taxpayers who want to comply with this rule has to do the following exercises every month.

1. Prepare the list of invoices on which he wants to claim ITC.
2. Match those invoices with the invoices available in GSTR-2A.
3. Bifurcate the matched invoices in 2 categories. 
   1. Matched invoices of vendors who have filed GSTR-1 within the due date.
   2. Matched invoices of vendors who have filed GSTR-1 after the due date.
4. Identify the matched invoices of past months, which are becoming eligible for availment in the current month.
5. Keep a record of invoices which are becoming eligible for availment in next months so that they do not get missed out from ITC claim.
6. Claim the ITC of invoices which are eligible for availment in the current month. A variance of 10% is allowed.

As we can see, the above steps can appear very simple to write but believe us they are really difficult to implement in practical situations. Now let’s see what are the difficulties, the taxpayers will be facing? 

1. Matching of Past Invoices: As per GST rules, the ITC of a particular invoice can be claimed up to September of the next financial year. This means that to do the matching, at the maximum the taxpayer can be required to match GSTR-2A of the last 18 months. 
2. Dynamic nature of GSTR-2A: GSTR-2A is a dynamic document. Thus for the matching process, the taxpayer is required to download the GSTR-2A for each of the past months.
3. Tracking GSTR-1 filing dates of vendors: As per the new condition, the ITC will become eligible for availment based on the GSTR-1 return filing dates of the vendors. Thus the taxpayers have to track the return filing dates of vendors.
4. Keeping a record of availment eligibility of the invoices: Due to vendor filing date condition, the taxpayers have to keep a record of availment eligibility of invoices. He needs to track when a particular invoice will be eligible for availment. 

Thus with these challenges, the taxpayer has to complete a very difficult task of complying with rule 36(4). 

We at Digitax Automation are in the process of streamlining this process. Rule 36(4) reports will be added in our system very soon. You can contact us at support@digitaxindia.com for any queries. 

The post How to comply with Rule 36(4) for claiming GST Input Tax Credit first appeared on ITC Reconciliation, GSTR 2A Reconciliation - Digitax Automation.