What is Matching in Input Tax Credit?

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Published Date:  27-12-2023   Author:   ateet-sharma
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Table of Contents

Introduction

The indirect tax system in many countries has seen a lot of changes and improvements after the emergence of the GST system. GST has one major feature named Input Tax Credit (ITC). ITC is a process through which businesses can claim credit for the taxes paid on inputs and hence use it to compensate their output tax liabilities.

But this is not so easy. The proper functioning of ITC requires an up-to-date matching process. In this article, we will get a deep understanding of how the ITC matching process works, important procedures, best practices, documentation requirements etc.

Understanding matching in GST credit

Matching GST credit means a reconciliation process that takes place between the ITC claimed by the buyer and the taxes paid by the supplier. This means it ensures that the credit claimed by the buyer tallies perfectly with the actual taxes paid by the supplier. The process plays an important role in the maintenance of the integrity and accuracy of the GST system.

It assures the proper functioning of the GST system, promotes transparency and prevents tax evasion. Under the GST regime, every eligible tax credit claimed by the supplier shall have a relevant tax invoice. If not tax invoice then at least some other supporting documents are uploaded by the supplier. The GSTN (Goods and Services Tax Network) facilitates the matching process and ensures that the credit claimed is genuine.

The following details have to be furnished with goods and services as per the GST Advisory Council for ITC matching

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GST Return Form Responsible Party Required Declaration
GSTR- 1 Supplier or Seller Details of outward supply as per the Invoice
GSTR-2A Auto-populated from GSTR-1 Auto Populated based on Supplier return
GSTR-2 Recipient Addition and deletion of ITC items can be done in this form
GSTR-1A Auto-Populated by Supplier The supplier can add delete or amend the outward tax items based on goods or services received
GSTR-3 Supplier and Recipient Matching of ITC takes place only after the due date of submission of Returns GSTR-1 and GSTR-2

Source: – https://enterslice.com/learning/process-matching-itc-input-tax-credit-under-gst/

Importance of accurate matching for ITC

Input Tax Credit (ITC) has played a great role in the dynamics of taxation. The ITC mechanism helps businesses to offset the taxes paid on input against their output tax liabilities. However, the proper functioning of the same relies a lot on accuracy in the matching process. Let’s understand the importance of accurate matching of ITC in the GST regime.

  • Ensuring Financial Integrity

Accurate matching is very important to maintain financial integrity within the GST framework. It ensures the ITC claimed by the buyer is the tax paid by the supplier and there is no flaw in this. This alignment maintains financial integrity and even stops the occurrence of financial fraud.

  • Prohibiting Tax Leakage

The accurate ITC matching is a weapon against tax leakage. When the reconciliation of the buyer’s credit with the supplier’s tax payment takes place, it nullifies any attempt of evasion of taxes. This protects the government revenue and assures that the tax collected is fair and genuine.

  • Promoting Fair Taxation Practices

Accuracy in ITC matching is also helpful in promoting fair tax practices. The ITC matching assures that the business is genuine enough in payment of taxes and doesn’t take advantage through unethical ITC claims.

  • Enhancing Compliance and Transparency

Compliance plays an important role in the tax system. Accurate ITC matching helps in achieving this. Businesses that are truthful enough to reconcile their ITC contribute to transparency in the tax environment. This enhances smooth interaction between businesses and tax authorities.

  • Minimizing Disputes and Litigation

Accurate matching can help minimize disputes and litigations for ITC claims. By justifying that the documentation is okay and claimed credit is genuine businesses can reduce their chance of facing any legal challenges.

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  • Enhancing Investor Confidence 

In the globalized economy, investor confidence plays a very significant role. Businesses that reflect accurate matching of ITC impress the potential investors and thereby creating a positive environment.

Procedures for matching ITC transactions

The ITC mechanism can succeed only when there is a proper execution of matching transactions. Here are certain steps that a business must take to ensure accuracy and seamless reconciliation.

  • Supplier Documentation

The process begins when the supplier starts uploading details of sales transactions. This includes debit notes, tax invoices, and other relevant documents. These are uploaded on the GSTN Portal. This becomes the first step in the process of the digital trail of transactions.

  • Auto-Population of ITC Details

The GSTN auto-populates the ITC details of the buyer automatically based on information sent by the suppliers. This electronic credit ledger is one type of central repository where buyers are allowed to review and reconcile the claimed credits.

  • Buyer Reconciliation

Buyers now tally the auto-populated ITC details with their purchase records. If any discrepancy has been found then they mark it as the area that requires clarification.

  • Communication and Rectification

Buyers get in touch with suppliers to rectify discrepancies. This communication includes getting missing invoices, clarifying discrepancies or correcting errors to align buyer’s records with the supplier.

  • Acceptance or Rejection

Finally, the buyer decides on acceptance or rejection. Buyers decide whether to accept ITC details or reject them.

  • Record-Keeping

Proper record-keeping is a very necessary part of the ITC matching process. Buyers and suppliers must maintain a proper record of invoices, communication and rectification steps. This documentation serves the purpose of audit and it also stands as proof in times of disputes.

  • Periodic Reconciliation

Period reconciliation is very necessary. Businesses shall conduct reviews on a day-to-day basis so that the matching process is perfect.

Also Read: How to Avoid Making Mistakes When Claiming ITC on Banking Transactions

Best practices for effective ITC matching

Accurate matching assures that claimed credit aligns with taxes paid by the supplier. This promotes compliance in the tax system and enhances the overall efficiency of the taxation process. Here are some best practices for effective ITC matching that businesses can adopt.

  • Regular and Systematic Reconciliation

It’s necessary to implement a regular and systematic reconciliation process for effective ITC matching. Businesses shall conduct periodic reviews of the ITC transactions to rectify any discrepancies if found. 

  • Automation of Matching Processes

Technology can be integrated into the system which can automate the ITC matching process. This will reduce manual errors and also enhance speed and accuracy. Advanced software can be used to perform the task in real-time and provide insights for quick resolution. This will also save a lot of time and also improve the overall efficiency.

  • Education and Training of Stakeholders

You shall see that the internal stakeholders have having good grip on ITC matching processes. Regular training sessions can be conducted which will help employees to stay updated about the GST regulations and if any changes in procedures.

  • Adherence to Timelines

Strict adherence to timelines is required in the ITC matching process. If you meet the filing returns deadlines and reconcile transactions then a smooth and compliant workflow can be maintained. Businesses that prioritize timings can reduce the penalty risks and ensure disciplined tax compliance.

  • Documentation of Communication

A proper record of all communications with suppliers needs to be maintained for ITC discrepancies. This can include emails, letters and any other form of communication. This documentation is very helpful in case of audits and serves as proof.

  • Technology Integration  

Technology shall be integrated that make compliance checks easy. Automated compliance checks can help in detecting any flaws in regulatory requirements. This will check that the ITC matching process is as per the GST regulations.

  • Cross-Functional Collaboration

Collaboration between finance, procurement and tax departments will take care of an ethical approach towards reconciliation. Collaborations will also enhance the accuracy and efficiency of the ITC matching workflow.

Documentation requirements for ITC reconciliation

Effective ITC reconciliation ensures financial accuracy as well as fulfils compliance requirements and helps in strategic decision-making. But for all these things proper documentation plays an important role. Proper documentation facilitates smooth reconciliation. It can also be used as proof during disputes. Here are certain documentation requirements for ITC reconciliation.

  • In-depth Invoice

Invoice documentation plays a pivotal role in ITC reconciliation. Every invoice related to the procurement of goods and services shall be recorded properly. The details that need to be captured include GSTIN, description of goods and services, applicable GST rates, supplier information, invoice number etc. This information is the base of accurate ITC reconciliation.

  • Valid GSTIN and Supplier Verification

Validating the GSTIN is an important step in ITC reconciliation. Companies shall validate the GSTIN of both supplier and recipient so that there is no mismatch. Verification of supplier is also necessary as only credit-registered and tax-compliant suppliers can claim ITC.

  • Credit and Debit Notes

Credit and Debit Notes are an important part of the business cycle. So proper documentation of them is very important for ITC reconciliation. Companies shall have a proper record of all credit and debit notes issued and received. These documents act as evidence for adjusting ITC claims.

  • Transition Credit Documents

In case of transition from the Pre-GST regime to GST, companies may be eligible for transitional credits. A proper documentation transition credit is very important. This documentation will provide relevant historical context to the ITC reconciliation.

  • Auditable Records of GST Audit

GST audits take place regularly as a part of compliance with the GST regime. A proper documentation is necessary to justify the auditors. Organisations shall develop a habit of maintaining a proper auditable record related to ITC. A proactive approach to maintaining this record helps in smoother audits and also brings accuracy to ITC reconciliation.

Also Read: Input tax credit (ITC) Reconciliation in GSTR-9

Ensuring precision in ITC matching processes

Input Tax Credit is the backbone of the business tax structure. To ensure that precision in the ITC matching process is necessary for GST compliance. Here are some strategies to ensure ITC matching.

  • Comprehensive Documentation

Proper documentation of business transactions is a must for precision in ITC matching. Each invoice shall be documented in detail. Proper documentation becomes the base for accurate ITC matching. This allows businesses to reconcile the claims with actual transactions.

  • Real-Time Transaction Monitoring

Real-time monitoring is required for business transactions. This can be achieved by integrating automated systems to monitor transactions. With the help of real-time monitoring businesses can rectify errors promptly and prevent inaccuracy.

  • Automated Matching Algorithms

Due to the high volume of transactions in business, it is necessary to adopt the automated matching algorithm. These algorithms are powered by artificial intelligence which can analyse data and identify patterns which match the transactions in a high degree of accuracy.

  • Continuous Training and Skill Enhancement

Continuous training and skill development are required due to frequent changes in GST regulations and technology. Finance professionals employed for ITC reconciliation shall stay updated on the latest updates in the GST. A proper and continuous training is required for this.

Conclusion

Matching Input Tax Credit has a significant role in the GST regime. Accurate matching is essential for preventing tax evasion, proper maintenance of taxation practices and reduction of disputes. Businesses must follow proper documentation, follow best practices and integrate technology to ensure the precision of the ITC matching process. This will contribute to a transparent and efficient tax system.

Also Read: The different methods of accounting for ITC

Frequently Asked Questions

  • What is invoice matching?

Invoice matching means comparing the supplier invoice with underlying data on a purchase order and goods delivery receipt.

  • What is a 2-way matching process?

The 2-way matching process consists of matching the quantity and amount on the invoice with the quantity and amount on the corresponding purchase order.

  • What if the invoices do not match?

If the invoices do not match then the same shall be reported to the supplier. The mismatch will require proceedings if the supplier has made a supply but forgot to pay tax on it.

  • Why ITC matching is important in GST?

ITC matching is important to ensure that integrity is maintained in the GST system. It helps in maintaining the accuracy of tax credits claimed by businesses.

  • How does the matching process work? 

In the matching process of ITC cross verification of details takes place. Details in GSTR-2A are matched with details declared by the recipient in GSTR-3B. if any differences are found then that needs to be rectified.

  • How frequently the ITC matching shall take place?

ITC matching shall be performed every month. This helps in identifying any discrepancies and rectifying them to keep accurate records. 

  • Can ITC be claimed if there is a mismatch?

It is advisable to rectify the mismatch and then claim the ITC. Because any kind of mismatch will lead to a penalty.

  • Why is GSTR-2A reconciliation important?

GSTR-2A reconciliation helps in finding and uploading incomplete invoices from suppliers. It also ensures accuracy in recording transactions.

  • What happens if there is non-compliance in ITC matching?

Non-compliance in ITC matching can lead to penalties and denial of claimed credit. In addition to this, there can also be legal consequences.

  • What are the common reasons for mismatches in ITC?

Some of the common reasons for ITC mismatch are differences in invoicing details, variations in taxable numbers, errors in reporting, and non-filing of returns by suppliers.

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Ateet Sharma

Ateet Sharma is a B.com graduate and has done an MBA in Finance. He has worked majorly in the banking sector for more than 5 years. He has worked for retail banking as well as credit analysis and has worked for banking brands like Axis Bank, DHFL, Capital First, Bajaj Finance etc. He has written articles on varied topics in finance like banking, taxation, insurance, stock markets etc. Ateet likes to listen to music and read books in his free time.

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