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Matching and Reversal of input tax credit

Matching and Reversal of Input Tax Credit (ITC)

Matching and reversal of ITC play a crucial role in ensuring transparency and compliance in the GST system. Businesses must regularly reconcile their ITC claims with GSTR-2B and follow the prescribed reversal procedures to avoid penalties and maintain seamless GST compliance.

Introduction

Input Tax Credit (ITC) is a key feature of the GST system that allows taxpayers to offset the tax paid on purchases against the tax payable on sales. However, to prevent misuse and ensure compliance, ITC claims must be matched with supplier data, and ineligible ITC must be reversed.

1. ITC Matching Process

The GST system automatically matches ITC claims using the following process:

Step 1: Supplier’s GST Filing (GSTR-1)

  • The supplier files GSTR-1, detailing outward supplies (sales).
  • The data is auto-populated in GSTR-2B of the recipient.

Step 2: Recipient’s ITC Claim (GSTR-3B)

  • The recipient claims ITC in GSTR-3B based on purchases.
  • ITC must match the eligible credit in GSTR-2B.

Step 3: Auto-Matching in GST Portal

  • ITC claimed in GSTR-3B is compared with supplier data in GSTR-2B.
  • If the supplier has not reported the sale, a mismatch occurs.

Step 4: Reconciliation and Resolution

  • Businesses must communicate with suppliers to ensure correct reporting.
  • ITC claimed in excess of GSTR-2B must be reversed.

2. Reversal of ITC

If ITC is wrongly claimed or does not meet GST conditions, it must be reversed.

When is ITC Reversed?

  1. Supplier Non-Compliance: If the supplier does not file GSTR-1 or pay tax.
  2. Non-Payment of Invoice: If the recipient does not pay within 180 days.
  3. Goods Lost or Destroyed: ITC is ineligible if goods are lost, stolen, or written off.
  4. Mismatched ITC: If excess ITC is claimed beyond GSTR-2B data.
  5. Exempt or Personal Use: ITC used for non-business purposes must be reversed.

Process of ITC Reversal

  • ITC reversal is done in Table 4(B)(2) of GSTR-3B.
  • The reversed ITC is added to the output tax liability.
  • Interest @ 18% p.a. applies if ITC is wrongly availed.

3. ITC Re-Claim Process

  • If ITC is reversed due to non-payment to the supplier, it can be reclaimed after payment.
  • The supplier must report the invoice in GSTR-1 for ITC to be re-eligible.

4. Importance of ITC Matching & Reversal

  • Prevents fraudulent ITC claims.
  • Ensures tax compliance and accuracy.
  • Avoids penalties and legal actions under GST law.
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