New Buzz in the World of Compliances: KYC

The world has seen a lot of changes through centuries and business also. Today, we have grown from a localized world to a globalized world; it can be dubbed as e-village. The business can acquire any materials or components, or services from any corner of the globe and sell to any customer across the globe. This has brought in new markets and opportunities but at the same time has brought additional risks in way supply chain disruptions due to the pandemic or increased focus on localization and change in the consumer spending pattern.

The rollout of GST in India has made the whole country as One Market, thereby facilitating trade and commerce across the length and breadth of the country. This has also posed a new challenge as the supplier of goods or services will not have any personal relations as they are distinct places and know about his details completely; before the rollout of GST, the supplier of goods or services used to have personal rapport as they were close by and very few to deal. This has given an additional set of challenges.

In today’s dynamic world, the need of the hour is to have complete knowledge of the customers and suppliers. To have this, many of the companies have already started the Customer/Supplier onboarding process. This process is expected to cover vital information like the Customer/Supplier’s registration details across tax regimes or departments, the key contact person details and the bank details for remittance or funds transfer.

In the competitive, it has become mandatory and necessary to evaluate the supplier or customer before placing orders or making supplies. To date, we are aware of Know Your Customer’s concept is the concept used predominantly in the BFSI sector, and now the same is being implemented in all the sectors. In today’s world, KYC is being termed as Know Your Partner (KYP). If the taxpayers do not do their due diligence properly and start the suppliers, it can adversely impact their top line and bottom line.

Know Your Partner – Supplier

In the normal course of business, when a purchase order or work order or contract or tender is allotted, the following points are considered

1. Cost
2. Consistency in Quality
3. Capacity to Supply or Deliver
4. Post Supply Service
5. Financial Strength
6. Environmental, Social and Governance Score

The above is an exhaustive list and depends from taxpayer to taxpayer.

ESG Score is added off late, and in India, it is still in the infancy stages. Evaluating the ESG score helps to understand the company’s culture, commitment towards the environment, long term strategy to meet the disruptions.

Now, GST is also required to be considered in the vendor evaluation framework. GST compliances need to be verified before having any transactions with supplier for the following reasons

1. Filing of Returns – need to verify if the supplier is filing the returns on time or not. If not, then there is a potential risk of defaulting the return filing.
2. Timely filing of Returns – filing of returns is important but what is more important is timely filing. This will indicate that the supplier has potential cash flow constraints. If such is the case, can the taxpayer make supplies as per the schedule? Or is it because of the lack of systems at the vendor’s place? Does this have to be ascertained before taking the contract forward?

The above is quite a few aspects that are critical for the business and this vendor evaluation. There are multiple ways to do the same, like manually going to the GST Portal and verify it vendor-wise else do it bulk using a third-party application. The only challenge in both approaches is the users have to do this job religiously else it will backfire.  The best is integrating the ERP/Accounting with a third-party solution or homegrown solution (not recommend as it is not of core competency and consumes a lot of time and effort for integration).

The major challenge is if the taxpayers do not do the due diligence at the time of issue of PO/Work order or contract, the delay in filing of returns by the suppliers will call for additional cash flows as the GST liability has to be discharged using cash rather than using the input tax credit. This will impact the working capital management as well increase the borrowing costs impacting the bottom line. Apart from this financial implication, the taxpayers have to follow up with the vendors for their filing, which involves intrinsic costs.

Know Your Partner – Customer

Any organization has a process of onboarding customers for the first time, which is a normal process. The parameters normally considered while onboarding the customer or while determining the pricing subsequently are

1. Price
2. Payment Terms
3. Volume
4. References
5. Compliance
6. Financial strength

We used to hear in the olden days “Customer is King” in today’s world of regulations; this is not much relevant. Before onboarding a customer, the taxpayers must take additional verification or due diligence to ensure that cash flows are not adversely impacted.

In the case of the banking industry, it the need of the hour. The lender can verify the GST Data for his purchases and sales of the borrower from the GST Returns and basis on that, compare with the CMA data being submitted from time to time. This will help the lender identify the risks early, take corrective steps, and ensure the account does not slip into the NPA category.

In the recent past, we have seen that the department is first suspending the registration at the first stage, in the second stage, it is canceling the registration, and, in some cases, even the bank accounts are attached.  If such is the case, it will impact cash flows as the customer will not pay on time. This can hurt the organization very badly and can also impact the operations if the exposure is very high with the customer. It is not only for GST; even in MCA, if the returns and other compliances are not met properly, RoC is freezing the bank accounts. The taxpayers have to deal with multiple regulations to see their compliances and status.

To avoid getting into this trap, before the acceptance of the recipient/customer’s purchase order, the return filing status and the timing of the returns have to be checked and verified.

Due to the pandemic, every organization has been impacted, and there is an impact on cash flow; this has resulted in a delay of returns. However, the Government has announced relaxation in the return filing dates,  interest rates and penalties. From a statutory perspective, these measures give legroom for the taxpayers, but as a businessman, we need to evaluate on above lines before taking any future supplies. 

Good Service Tax is one of the biggest tax reforms in India post-independence, but in reality, it is a business process reform. It has brought in One Nation One Tax which resulted in seamless input tax credit across the supply chain, same tax rates, same classification and common return filing. Though these are the major benefits, we had some teething trouble with the portal, and the same has been resolved to a larger extent. We could see improvements from time to time after the rollout of GST on the portal, and to provide better user experiences, new features are being added to the portal from time to time. Apart from these changes, the taxpayers are also required to make changes in their business after the rollout of GST, and for this reason, only it is also dubbed as Business Reform. After the GST rollout, the taxpayers had to revisit their contract terms or change the process of availing input tax credit, issuing various documents in GST from time to time to be tax compliant.

Apart from the above changes, the taxpayers have to be more focused on purchasing and whom to sell. This decision will play a key role in maintaining the bottom line as well as effective cash flow management.  Taxpayer rating is already envisaged in the law under section 149 of the CGST Act, but it is not yet notified. The trade and industry need not wait for the same; the same can be adopted and implemented using various third-party tools (ComQuo or peridot). When you select a third-party site, ensure that they provide multiple services. With the recent changes in income tax, the amount of tax to be deducted is double the actual amount if the vendor has not filed two previous returns. Automation will help to maintain the compliances. The cost of compliance is very much lesser compared to the cost of non-compliance. In case of non-compliance, there is a need to spend money and efforts to reply to notices and visit the department offices from time to time.

Disclaimer

 Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the author may or may not be associated with in professional or personal capacity unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

All About Input Tax Credit Restriction

Self-Assessment of the liability and input tax credit are the two business-friendly measures rolled out in GST, and it is being misused by a section of the taxpayers. As a result of it, to curb the tax evasion on the supply side, e-way bills were introduced, and now it is completely operational. On the input tax credit side, the provisions of the act were clear that the buyer/recipient can avail input tax credit only on matching ( seller will file his return, and the same will be reflected in the buyers return, and there he was supposed to accept or reject or modify the same) and this was kept on hold based on the feedback received from the trade and industry. But off late, lots of cases of input tax credit frauds and tax evasion are being detected. To put an end to all these, the Government has decided to simplify the return filing process and also start implementing the same from the 1^st of Oct 2019, but the same is deferred till the 1^st of April 2020 basis of the decisions taken in the 37^th GST Council Meeting.

Like a bolt from the blue, on 9th Oct 2019, Notification No 49/2019 – Central Tax, dated 9th Oct 2019, was issued stating that matching is mandatory. There were a lot of interpretation issues on the effective date and amount of restricted input tax credit to be derived. To address the same, CBIC has issued a clarification on  Circular No. 123/42/2019– GST dated 11th Nov 2019.  As on date, most of the queries/interpretation issues have been cleared, baring a few. What is the restricted input tax credit, how it works etc., are explained in simple FAQs for the users to understand and comply with the latest GST Provisions.

FAQ’s on the restricted input tax credit

1. What is the effective date for matching?

The effective date of the matching and availing of the 20% restricted input tax credit is 9^th Oct 2019, which means it is applicable for filing of the returns for Sep 2019 also.

The wordings used in the “Notification No 49/2019 – Central Tax, dated 9th Oct 2019 “Save as otherwise provided in these rules, they shall come into force on the date of their publication in the Official Gazette.” The same is published in the Official Gazette on 9^th Oct 2019, only wide Gazette No REGD. NO. D. L.-33004/99. It is also confirmed wide Circular No. 123/42/2019– GST dated 11th Nov 2019.

2. What should I do as I have availed input tax credit without matching while filing the returns for Sep 2019?

At the time of filing GSTR – 3B for Oct 2019, you have to do the matching for both the months. For the unmatched invoices for the GSTR – 2A of Sep 2019, you have to reverse the same along with interest for the differential days @ 24% as per the provisions of Section 51 of CGST Act 2017.

3. On what basis GSTR – 2A and my purchase register should be matched?

As per the provisions of Rule 69 of the CGST Rules 2017, matching has between the purchase register and GSTR – 2A has to be carried out for the following

1. GSTIN of the Supplier
2. GSTIN of the Recipient / Buyer
3. Invoice or Debit Note Number
4. Invoice or Debit Note Date
5. Tax Amount

For every document, if any of the above fields do not match, then input tax credit cannot be availed.

4. What could be the reasons for the differences between GSTR – 2A and my purchase register?

1. The supplier must not have filed the return
2. The supplier has not uploaded the tax invoice
3. GSTIN wrongly entered by the Supplier
4. GSTIN wrongly entered in the accounting / ERP Package
5. Tax invoice number wrongly entered by the Supplier
6. Tax invoice number wrongly entered in the accounting / ERP Package
7. Tax invoice date wrongly entered by the Supplier
8. Tax invoice date wrongly entered in the accounting / ERP Package
9. The supplier ships goods but they are in transit
10. Goods received but not accounted – in QC/ Bills to reach the Accounts department
11. The supplier has not entered the invoice amount correctly
12. Invoice amount wrongly entered in the accounting / ERP Package
13. The invoice amount is manually overwritten for shortages/breakages or any other reason
14. The supplier has issued the invoice but not shipped the goods
15. Invoice issued by the supplier but not received by the recipient

 

5. How is the 20% restricted input tax credit derived?

20% of the restricted input tax credit is derived basis of the total of the input tax credit available in the GSTR – 2A for the month for which return is being filed. The same is explained in the example given below

Total purchases in a month where ITC is eligible is Rs 10,00,000 & actual purchases on which tax is paid is Rs 12,00,000

Amount Reflected in GSTR – 2A s Rs 7,00,000 and amount eligible for availing input tax credit is Rs 6,00,000

What is the provisional credit which can be claimed?

20% of eligible credit i.e., Rs 6,00,000

20% of Rs 6,00,000 = Rs 1,20,000

Total amount of Credit eligible for the month = Rs 6,00,000 + Rs 1,20,000 = Rs 7,20,000

6. Is the 20% input tax credit restriction available for the sum of all the taxes or tax-wise?

As the same is notified in the Rules and the rules are different for the different taxes, it means the restriction is for each tax, i.e., for CGST, SGST, IGST & Compensation cess.

7. Do I need to consider the input tax credit on account of reverse charge, ISD, import of goods, etc. for computing the restricted input tax credit?

No, It is not required to considered for determining the restricted input tax credit.

8. Can i take the input tax credit if the supplier has not paid the taxes in the subsequent months?

If the supplier has not paid the taxes or filed the return of uploaded your invoice in the subsequent returns, then you have to reverse the input tax credit claimed on those invoices and pay interest on the same.

9. How to take the input tax credit if the supplier has filed and paid the taxes in the subsequent months?

If all the suppliers have filed and paid the taxes, then the differential amount of tax can be claimed in the month during which the supplier has filed or paid the taxes or uploaded the invoice.

10. How much input tax credit I can avail if the sum of the restricted credit and eligible credit is more than the amount showing in GSTR – 2A?

If the 20% restricted or provisional credit is more than the eligible amount, then the taxpayer has to avail on the eligible amount only. The same is explained in the example below

Total purchases in a month where ITC is eligible is Rs 1,00,000 & actual purchases during the month is Rs 15,00,000

Amount Reflected in GSTR – 2A s Rs 12,00,000 and amount eligible for availing input tax credit is Rs 90,000

What is the provisional credit which can be claimed?

20% of eligible credit i.e., Rs 12,00,000 i.e., is Rs 2,40,000

Eligible credit is only Rs 1,00,000, so the taxpayer can avail max of Rs 10,000 ( Rs 1,00,000 – Rs 10,000).

11. Are there any changes required in my accounting practices?

Yes, if the accounting practices are changed, it will give complete control and visibility for tracking the errant suppliers. The general practice is whatever are the amounts available in the ledger are considered for the return filing.  So, it is recommended to change the accounting policy also.

For this, new ledger accounts have to be created at each registration level if multiple registrations exist. The new ledgers to be created are

Sl.No	Ledgers
1	Interim / Suspense / Provisional ITC – SGST
2	Interim / Suspense / Provisional ITC – CGST
3	Interim / Suspense / Provisional ITC – IGST
4	Interim / Suspense / Provisional ITC – GST Cess

The existing accounting entry, which is passed/generated at the time of GRN/MRN creation or booking of the purchase invoice, also has to be changed. The existing accounting entry is

 

Ledgers	Debit / Credit
Inventory / Services / Expenses A/c	Dr
ITC – SGST A/c	Dr
ITC – CGST A/c	Dr
To Suppliers A/c	Cr

The new accounting entry which is to be passed or generated at the time of the creation of GRN / MRN or booking the purchase invoice should be

 

Ledgers	Debit / Credit
Inventory / Services / Expenses A/c	Dr
Interim / Suspense / Provisional ITC – SGST A/c	Dr
Interim / Suspense / Provisional ITC – CGST A/c	Dr
To Suppliers A/c	Cr

The accounting entry to be passed or generated at the time of matching is

Ledgers	Debit / Credit
ITC – SGST A/c	Dr
ITC – CGST A/c	Dr
Interim / Suspense / Provisional ITC – SGST A/c	Cr
Interim / Suspense / Provisional ITC – CGST A/c	Cr

As the revised accounting entries are at the supplier level, it will give complete visibility on the suppliers who have not filed the returns and also helps in follow up with the suppliers more effectively.

12. How should I do the reconciliation?

Reconciliation has to be carried out for each invoice and every month. The challenge is if the supplier files the GSTR Returns in the subsequent tax periods, then the same will be updated in the GSTR – 2A for the period in which the invoice is generated. The taxpayers have to check the GSTR – 2A of the previous months till the supplier files the returns or till filing of the September months return or filing of the annual return whichever is earlier. The reconciliation statement has to be maintained for each month, along with a consolidated statement.

13. Can I adopt technology to address the same?

Yes, there are a lot of tools available for the reconciliation, and also most of the ERP’s support the availing of the input tax credit on a provisional basis and availing the same only at the time of matching. If the existing accounting software or ERP provides the same, it should be implemented immediately as it will save a lot of time and effort.

14. Is it mandatory to avail the restricted input tax credit?

No, it is not mandatory to avail the restricted input tax credit; the option is given to the taxpayers to avail or not.

15. What are the other alternatives I have if I do not like to avail the restricted or provisional credit?

There are other options like while awarding the contract or purchase order to the suppliers, who are filing the GST Returns in time. The supplier’s tax filing compliance also has to be verified along with the price, quality, after supply service, along with the previous track record.

Now it clear that the matching is mandatory and also the process on how to derive the restricted 20% input tax credit. Now the taxpayers have to follow the same from the 9^th of Oct 2019, but due to interpretation issues, many of the tax professionals have concluded that it is effective for the filing of Oct 2019 returns. The taxpayers have to take a clear decision on to avail the 20% of the restricted credit along with the eligible input tax credit or avail only the eligible input tax credit after considering the following points

1. Borrowing cost for the restricted 20%
2. Cost of time and efforts required for deriving the 20% restricted credit
3. Training the respective stakeholders
4. Cost of automation – if the same is provided in their existing accounting or ERP or separate software is required.

Unless and the taxpayers do a cost-benefit analysis for availing the 20% restricted credit or not based on the above-discussed points, it would be difficult to ascertain the same. It is typically required for large corporates where they have 1000’s of purchase invoices monthly. Whatever is the decision, it will be applicable from the next month’s transactions and for filing of the returns for Oct 2019, they have to do reconciliation if the decision is not taken.

Source – https://icmai.in/upload/Taxation/TaxBulletin/Tax-Bulletin-52.pdf

Disclaimer

Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the author may or may not be associated with in professional or personal capacity unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

FAQ – 17

What are the various reasons where the GST Liability as per financial statements and GST Returns could be different?

There could a difference due to the following reasons commonly

a) Revenue Recognition

b) Stock Transfer outside the states

c) Advance Receipt from customers

d) GST on paid on job work if not returned in stipulated time

e) Reverse charge on certain goods on outward supplies

f) Reverse charge on inward supplies paid

GST Tip – 373

In case of movement of goods on sale or approval basis, the supply is known only at the time of acceptance by the customer, after customers acceptance only tax invoice can be issued.  Until such point of time, the goods are to be removed or moved only on delivery challan and e-waybill if applicable.

GST Tip – 184

As per the CGST Act, a receipt voucher can be issued for recording the receipt of advance from the customer under GST, as taxes are applicable on receipt of money under GST for the supply of goods and services.

GST Tip – 90

As per the time of supply under GST, receipt voucher / tax invoice has to be issued at the time of receipt of advance from the customer (for supply of goods or services) and it has to be uploaded on the GST Portal which will issue a unique reference number for each of the documents and the same has to be reported in table of GSTR – 1.