GST return filing: New formats may stump taxpayers on adjustment entries : 15-10-2019

The GST Council in its 27th meeting discussed that the Government is keen to introduce the simplified return design to reduce compliance burden on the trade in keeping with the philosophy of ease of doing business. However, the stated objective seems to be diluted by requiring the taxpayer to make daunting adjustment entries. Under this New Return System, there will be one main return GST RET-1 (large taxpayers) and 2 annexures GST ANX-1 and GST ANX-2. ANX-1 primarily contains details of outward supplies. ANX-2 contains details of inward supplies. RET-1 is consolidation of inward and outward supplies including various adjustment entries.

The suppliers undertaking B2B transactions will have to fill invoice-wise details of the outward supply made by them in ANX-1, based on which the system will automatically calculate his tax liability. The input tax credit (ITC) will be calculated automatically by the system in ANX-2 based on the details of invoices uploaded by the suppliers upon the acceptance by the recipient. ANX-1 is completely based on user input and ANX-2 is completely automated. This gives a sigh of relief. But let’s not stop here and see what more is in store.

The main return RET-1 is not merely consolidation of ANX-1 and ANX-2. In fact, RET-1 requires mammoth exercise to input the details of adjustment entries. Before we proceed to discuss the adjustment entries, it is important to mention that system is designed in a fashion wherein the recipient must take an action namely accept, reject or pending on the details of invoices uploaded by the supplier. Acceptance denotes acceptance of that transaction whether or not eligible for credit. As soon as the invoice is accepted, the tax amount of invoice is automatically credited to electronic credit ledger of the recipient. Thereafter, the recipient is required to reverse the ineligible credit, e.g., restaurant bills in RET-1. Meaning thereby, the business must make a parallel system for recording of the invoices ineligible for ITC under Section 17(5) of the CGST Act for reversals under RET-1. In the current system, business is availing only eligible ITC in GSTR-3B. A miss to report reversal of auto-credited amount may invite interest and penal action.

Proceeding further, let’s take an example where a business receives short quantity of goods. On acceptance of the invoice, the entire amount of tax shall be credited to his Credit Ledger. Thereafter, the business will make reversal of ITC on quantity short received in RET-1. Let’s assume that the supplier of goods issues a credit note for short quantity in the next month. The same on acceptance will auto-decrease the ITC of the recipient which was in fact already reversed by the recipient. In such a case, the business has to re-avail the ITC in RET-1. Therefore, the business must keep a track of all credit notes and then make a trail with the past transactions to see whether the credit has already been reversed requiring adjustment entry.

Interestingly, all the adjustment entries must be reported at consolidated level without any reference of invoice number or credit note number etc. Therefore, tracing back a transaction is a herculean task. However, the complete chain needs to be recorded and preserved for audit for a period of even more than six years. Moreover, there are manual tables for adjustments of tax and ITC in transitional cases. Business should attempt to minimize the transitional cases by duly reporting the transactions in both GSTR-3B and GSTR-1.

Let us proceed to discuss the mismatch reporting. Business should match its purchases register with ANX-2 regularly to accept, reject or keep the invoice pending. In case, the supplier does not upload the invoice details, ITC will not get reflected in ANX-2 and hence, not credited in the electronic credit ledger. In such a case, the recipient can take provisional credit upto 20% of available ITC in RET-1. In case the supplier uploads the invoice in next 2 months, recipient shall accept the same and ITC will be auto-credited in his ledger. Since the provisional credit has already been availed, it would require a reversal. The invoices which are missing even after 2 months need to be reported by the recipient in ANX-1. Regular matching of invoices and their tracking for next 2 months and thereafter, is a voluminous exercise where business deals with thousands or lacs of invoices per day unless and until there is a robust IT system in place.

These adjustment entries are very onerous, and the New Return Formats may require undergoing a change to meet the main agenda of the GST Council of simplifying the return filing system. Recently, on 20th September 2019, the GST Council in its 37th meeting has deferred the roll-out of New Simplified GST Return. One will have to wait to see whether the New Return Formats are actually revised to make them simple in this buffer time. Nonetheless, this additional window certainly brings an opportunity for the taxpayers and the system to adapt for the challenges posed by the New Return System.

Source : PTI