Unresolved GST ITC Mismatches May Lead to Demand and Recovery Actions

In GST law a new rule 80D has been launched to deal with the mismatches between the ITC auto-populated in GSTR-2B and that shown in GSTR-3B via the assessee. The rule mentioned that-

• When the input tax credit (ITC) claimed in GSTR-3B is more than the ITC available in GSTR-2B, the system will automatically generate a notification in the form of DRC-1C to inform the taxpayer of this difference.
• Upon receiving DRC-1C, the registered individual must take action within 7 days. They can either make the necessary payment for the excess ITC claimed, along with applicable interest or submit a response explaining the reasons for the remaining excess ITC.
• If neither the mismatched ITC is repaid nor a response is submitted, or if the submitted response is deemed unacceptable by the tax officer, a show cause notice will be issued to demand the amount of the mismatched ITC.

During the recent 50th GST Council Meeting, a discussion took place regarding the consideration of discrepancies exceeding 20% or INR 25 lakhs for notifying the concerned registered individuals as per rule 88D. However, it's worth noting that no official notification confirming this has been issued yet. This raises the question of whether notifications based on the council's recommendation would hold validity in the absence of corresponding notifications from both the Central and State authorities.

Furthermore, it's important to acknowledge that there can be legitimate reasons for disparities in input tax credit (ITC), including ITC not being claimed in earlier tax periods due to delays in receiving inward supplies, ITC claimed for the import of goods and services, and other reverse charge obligations, which might not be reflected in GSTR-2B. Additionally, there might be genuine cases of ITC being re-availed for various valid reasons, some of which are mentioned in GST Form DRC-1C. The set thresholds for these differences are relatively low, and as a result, a substantial number of taxpayers could anticipate receiving system-generated notifications on a monthly basis.

Another amendment has been introduced to limit the filing of GSTR-1 for the next tax period unless the taxpayer has taken one of two actions: either deposited the specified differential amount as indicated in the intimation or provided an explanation in response. The reconciliation process between GSTR-2B and GSTR-3B has now become time-sensitive, with a narrow 7-day window provided, and no allowances for extensions, whether for making payments or reconciling discrepancies. Failure to take action within this timeframe will not only trigger demand proceedings initiated by the tax department but also prevent the filing of GSTR-1 for subsequent periods.

However, it remains unclear whether the filing of GSTR-1 will be obstructed in cases where no response is submitted or in cases where a response is filed but deemed unsatisfactory by the tax officer. It's important to note that the law mandates the sequential filing of GSTR-1 and GSTR-3B. Therefore, in the event of a mismatch, GSTR-3B cannot be filed for subsequent periods until this discrepancy is resolved. If this default in filing GSTR-1 or GSTR-3B continues for another tax period, it will also result in restrictions on the filing of E-way bills. In practical terms, this means that goods cannot be transported, bringing the whole business chain to a halt.

Previously, Rule 88C was introduced with a harsh provision allowing for direct recovery in cases where there was a discrepancy between the liability reported in GSTR-1 and that reported in GSTR-3B, and taxpayers followed in form DRC-1B route. Now, a new rule has been introduced to enable the issuance of a recovery notice, which means that the tax officer can initiate recovery proceedings directly, without issuing a formal decision with reasons. This leaves the taxpayer with no avenue to challenge the order through appellate channels.

This situation raises a significant concern, as the registered individual's only recourse would be to urgently approach the High Courts to seek a stay on the recovery action.

In the next months, taxpayers will likely get a rush of system-generated notifications as a result of the recently added requirements. In reality, notification in form DRC-1B has already begun to arrive at the enterprises. Businesses' sole option appears to be to challenge the provisions in the relevant forums.