Input Tax Credit Checklist Under GST Audit
This article provides some insights into the possible coverage in this ITC review providing draft a step wise ITC review list with comments. Some of the common errors in ITC expected has also been provided for ensuring that the ITC review is effective.
Understand the business: The general background of industry, company, challenges in indirect taxes faced by them, type of vendors and type of customers. This would help in conduct of the review.
Invoice Validity: The requirement of payment on taxes only if indicated in the invoice along with specified particulars. Also, confirm that all invoices where credit has been taken are available for verification and preserved properly.
Review the nature of services and goods: The nature of expenses incurred to ascertain GST impact and to assess GST credits: Any goods and services used in furtherance of business are eligible for credit other than those blocked (like credit on rent a cab). All major value of inputs, capital goods and services need to be identified.
Review of Sources: The question of procurements made only through registered dealer/ manufacturer/service provider needs to be confirmed. In case of procurement from unregistered dealer, the possibility of credit chain being broken and consequent increase in costs to be confirmed.
Review the system of claiming credit: The time of supply would be important for availing credit in respect of Inputs, Capital goods and RCM expenses. Verify if the goods and services are actually received and in a variable manner.
Review of expenses liable for GST under RCM: Most of the RCM payments could also be eligible for credits. If so whether paid and availed to avoid payment of irrecoverable interest.
Studying the nature of books of accounts maintained: The books to capture and identify that ITC has been availed. Review of financial ledgers to ensure that ITC are taken on all eligible heads. There may be a need to have bifurcation of accounts to enable the capture of such information.
Review of treatment of purchase returns to study the possible impact under GST: The tax paid on purchases returns on GST invoice is equal to credit on inputs.
Review the foreign currency payments: To ascertain RCM liability and availment of ITC.
- Review if goods / services at Branches/ Business verticals: Confirm if invoices are addressed properly for goods / services received at locations. Ensure that credit capture system and reconciliation is available in all branches within and outside the State. If expenses incurred at other than branches registered in the State, confirm that an input service distributor registration exists.
- Review terms of purchase orders vis a vis purchase invoices: Defective invoices can lead to disputes at a later date. They can however be rectified once identified.
- Review of rate of taxes: This would be more important for goods or services supplied. It may also be value additive for the vendors if the customer confirms the taxes. This should not be the responsibility of the customer but as on date, it could be.
- Review of method of capitalising the work in progress: This is to examine whether ineligible credits exist or eligible credits are not availed. This should be as per Accounting Standards and GST law.
- Review of credit availment mechanism and conditions to be fulfilled for credit: The need for having received the goods or services; the issue of a valid invoice, goods and/or services used in furtherance business. There may be a need to suggest improvement to automatically record the credit which can later be confirmed. This would be important in bringing down the cost of procurement of goods or services.
- Review if discounts agreed and valuation adopted by vendors: Ensure that they are in line with law and do not lead to loss of credits or double taxation There is a time limit for payment to vendors within 180- days. If it exceeds, ITC needs to be reversed with interest, however an amendment for without interest reversal has been proposed for amendment in the CGST Bill. On payment to the vendor is made, the credit can be claimed back. System to capture such reversals in recoverable accounts and their periodic nullifying may be suggested.
- Review if discounts agreed and valuation adopted by vendors: Ensure that they are in line with law and do not lead to loss of credits or double taxation