Returns are required to be filed in tax regime by the taxpayers declaring the details of their income in case of direct taxes and the amount of tax on it. In case of indirect taxes, it is a statement which shows the details of the purchases, the amount of input tax credit claimed on it, the total value of sales and the amount of tax payable on the same. Apart from this, the returns also act as a medium of information flow between the taxpayer and the department, whereby giving full visibility to the Government on the amount of taxes being collected based on items, services, or class of taxpayers or geographic regions. This information helps the Government in the determination of the policymaking on the tax rates and also which areas/goods there is more demand and which industry needs support from the Government.
In India, GST has been rolled out from the 1st of July 2017, and there is 360 0 change in the return filing process. Salient features of existing GST Return filing is
- Mandatory filing of online returns
- Same return formats for the State and the Central Taxes
- Filing of transaction-level data
- Same return formats across India
- Different return formats based on the nature of registration like Regular, Composition, Input Service Distributor, e-commerce Operator, etc.,
Though transactional data filing is mandatory in GST, the same is not effective in minimizing the revenue leakages as Matching of buyer’s data with the seller’s data is not implemented. It has resulted in the reduction of tax collections as a section of taxpayers is misusing it. To curtail this tax evasion, the Government is introducing the New Returns formats along with matching and e-invoicing. In the new returns, the number of returns to be filed by the taxpayer has been reduced, but at the same time, the need to have additional data to be uploaded. To implement the same in organizations, the taxpayers and professionals have to understand the requirements clearly and the basis that they have to revisit their business process.
Salient features of new return formats
- A single return to be filed for the inward and outward supplies
- Transaction data to be reported at HSN Level
- Each return is supported with two Annexures, Anx – 1 for the outward supplies and Anx -2 for the Inward Supplies
- Suppliers can upload the sales invoices on a real-time basis continuously
- The information flow between the supplier and the recipient is on near real-time basis
- For ease of taxpayers there returns formats have been introduced
- Quarterly filing of returns is available for the taxpayers having a turnover up to Rs 5 crores
- Debit / Credit Notes need not be tagged with a tax invoice
- Payment of taxes is to be discharged through PMT-08
- Different due dates for return filing for the monthly and quarterly taxpayers to reduce the load on the GSTN Servers to provide better user experience to the taxpayers.
- Matching tool for reconciling the Purchase Register with Anx – 2
Compared to the existing GSTR -1, which has lots of tables for classifying and reporting the various transaction, debit notes/credit notes, and amendments to the invoices. All these different tables make complex and confusing to the taxpayers and basis on the inputs received from the industry, trade bodies, professionals and department personnel the returns have the revised and made simple. The new returns will improve the user experience and also reduce the load on the GSTN portal as they are simpler, and the due dates for the regular and quarterly taxpayers are different.
Differences between the three returns data for Outward Supplies
Differences between the three returns for the Inward Supplies
Basis on the nature of transactions the taxpayers have, they have to select appropriate returns in GST. Newly registered taxpayers have the option of selecting any of the three return categories.
Data flow from Supplier to Recipient in the New Returns
- Once the Recipient accepts the invoice, the same gets locked in the Supplier’s return, and he cannot edit or modify the same.
- If the Recipient does not take any action, at the end of the month, the liability is finalized and updated in the returns accordingly.
- If the Recipient Accepts the invoice, the same is updated for his input tax credit.
- If the Supplier uploads the invoices before the cut off period, say 10th of the next month, if the Recipient accepts the same, can avail the input tax credit in the same month.
- If the Supplier uploads the invoice after the cut off period say 10th of the next month, the Recipient even if he accepts the same, the input tax credit will be reflected in the subsequent month.
Data from Anx – 1 and Anx -2 flows the respective returns, and then the liability is frozen. An option is also provided for the taxpayers to enter the input tax credit on the invoices issued before the rollout of the new returns but claimed after the rollout of the new returns.
With the new returns in place, a lot of changes are required in the business process and accounting. These changes will help to implement the same without any challenges and also ensure that there are no GAPS in the GST Compliance and data is readily available for the Annual Return and GST Audit if applicable.
As there is a requirement of matching of the supplier invoices before availing the input tax credit and payment of taxes, the taxpayer should train all the concerned stakeholders like Purchasing Team, Stores Personnel, Finance Team along with the taxation team. Even training has to be provided to the IT Team will be aware of the requirements and accordingly develop or make changes to the existing ERP’s / Accounting packages.
The business process of procuring the goods have to be changed at the earliest as a change in any organization faces resistance. The Purchase Department should have a process to check for the supplier return filing status as one of the conditions before the release of the purchase/service/work orders. This condition should be added along with the existing criteria like Quality, Price, Post Service, Warranty & Delivery period. As per the new provisions, even if the data is auto-populated in Anx – 2, if the Supplier does not file returns for two months, the input tax credit cannot be availed. Any deviations in the above process will strain the cash outflows as the taxpayer is deprived of the input tax credit and has to discharge the liability through cash.
Follow up with Vendors
The purchase department team’s KRA should be enhanced now to follow up with the suppliers for filing of returns and payment of taxes. Access should be provided for them for Anx – 2 so that they will have updated information and have regular follow-ups. This will help the organizations to avoid the last-minute rush at the time of filing of the returns. As the data is being updated on a near real-time basis, the purchasing department will have a complete picture of the upload of invoices by the suppliers from time to time.
Reconciliation is a tedious activity, and it requires a lot of patience and concentration. To steam line this activity, the large taxpayers should think of automating this whole process by making necessary changes to their ERP / Accounting software wherever possible or go for third party solutions with proper integrations. Alternatively, they can also outsource this activity and concentre on their business only. This will be a win-win situation as it creates more employment and at the same time, improve productivity.
As per the latest changes in the existing input tax credit mechanism and with the New Returns, the input tax credit is available only after matching. To keep track of the invoices which are matched and which are not matched, the accounting policies also have to be changed accordingly. The accounting entry at the time of receipt of goods or invoice entry should be debiting the interim / suspense account for respective taxes. At the time of matching the actual credit, the entry should be updated. This process will ensure you have to checks and balances in the system and also minimize the outflow of cash. Here also automation can help a lot; check if your accounting / ERP has this feature and if not explore for the option of customization and implement the same.
Additional Fund Requirements
As input tax credit is available only matching, this means there will be a requirement of funds in the short run. The additional requirement of funds should be projected accordingly and also make necessary arrangements for the same. Arrangement of additional funds also takes time and cost; this has to be factored accordingly.
Apart from this, the automation process and training also involve cost; budgets should be allocated for the same accordingly.
The top management and the key decision-makers should be appraised of the upcoming changes in the return filing system along with the implications. Management approvals are required in every organization and this will also help them in the decision-making process. In any organization, the implementation of the new process or change is possible to be implemented successfully if it is a top-down approach. This will give the finance/tax team to implement the same easily.
On the face of it, New Returns looks to be simple but the undergoing changes are tremendous and it requires proper planning and execution. For the adoption of new returns to be successful, the organizations have to strive hard and at the same time, ensure that there also lapses in compliance. If all the organizations adopt the same with full vigor and efforts, we can envisage the bouncy in the tax collections, which can result in tax rates reduction of goods and services.
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.
This article is published in the Supervisor released during the Third National Seminar on Taxation held on Bhubaneswar in Dec 2019.