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BW Businessworld

GST- Invoice Matching Principle Gets Statutory Recognition

The new return filing mechanism based on the matching concept was introduced under the GST law vide Finance Bill 2018 which permitted the recipient to take provisional input tax credit even on the invoices not furnished by the supplier to a maximum of 20% of eligible input tax credit as available in his inward details.

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We all are aware of the well-known doctrine of caveat emptor commonly used in contract law which places burden on the buyer to be aware about the condition of the product purchased and assume the risk if the product fails to meet expectations or have defects.

The recent amendment proposed in the provisions of input tax credit vide the Union Budget 2021 has given a new dimension to this famous doctrine by making the buyer not only being aware about the product that he is purchasing but also about the tax compliances of his vendors in respect of such products. According to the recent amendment, a buyer will not be entitled to take the input tax credit of the supplies received by him unless the same has been declared by his vendor (supplier) in his monthly statements and on which the taxes have been duly discharged by such vendor. Any non-compliance by the vendor will result in loss of input tax credit in the hands of the buyer. Imposition of such a condition on availment of input tax credit will fasten an additional responsibility on the buyers for ensuring timely and accurate compliances by their vendors.

Interestingly, there’s a background to the introduction of such a stringent provision under the Goods and Services Tax (GST) law.

GST law as originally conceived with an envision to reduce the cascading impact of taxes by allowing free flow of input tax credit in the supply chain. It is for this cause that this law was founded on the maker checker model. The originally drafted provisions required transmission of details furnished by the supplier on GSTN portal to the receiver. Any eligible input tax credits were allowed basis the acceptance or rejection by the recipient. This was an earnest attempt by the law makers to create an in-built check mechanism to detect any discrepancies in tax compliance and plug the gaps therein.

Due to some technical restrictions these provisions could not be made effective and an alternative process of return filing was introduced as a stop gap arrangement. Later the new return filing mechanism based on the matching concept was introduced under the GST law vide Finance Bill 2018 which permitted the recipient to take provisional input tax credit even on the invoices not furnished by the supplier to a maximum of 20% of eligible input tax credit as available in his inward details. Again the new return filing procedure did not see the light of the day. However, to enforce the matching principle on purchase invoices, the above restriction on input tax credit was introduced through the delegated legislation by amending the GST rules w.e.f. 1st October 2019. As per the said rule, input tax credit is restricted to 5% of eligible input tax credit matched with supplier’s reporting (earlier 20% till December 2019 and 10% till December 2020).

The above restriction was not being followed by many taxpayers who continued to take the input tax credit basis their purchase details despite of the fact that the same were not being reflected in their inward supplies details auto-populated on the GST portal. This gained the attention of tax officials who started issuing notices to the taxpayers for the differences between the input tax credit availed in monthly returns and details auto-populated on the GST portal and demanding the reversal of mismatched input tax credit.

Lacking the statutory backing, the vires of the above rule was challenged by the taxpayers before various High Courts. Moreover such a restriction imposed on the taxpayers due to non-compliance of their suppliers was being perceived as an undue burden on the bonafide taxpayers which left them at the mercy of their vendors’ actions.

Comprehending the prevailing gap in the existing legislation, the issue was taken up in 39th GST Council Meeting following which the conditions for taking input tax credit are now proposed to be amended to include the matching of invoices as requirement under the statute itself.

With this development, it is essential for the businesses to know that the provisions of matching of input tax credit have now been incorporated in the statute. Following the above changes, there is no room left with the taxpayers to challenge these provisions requiring matching of the input tax credit. Needless to mention that the litigation already initiated for past period will still hold water as these changes will become effective prospectively.

From a buyer’s perspective, this amendment is going to inflict a larger responsibility on them. Now they will not only have to ensure the completeness and accuracy of their own compliances but also of their suppliers’. Any abatement on this requirement will cost them valid input tax credits.

Considering the above, as a prudent taxpayer, one must take necessary steps to safeguard their interests. It would be essential to revisit the existing processes such as accounts payable process to ensure necessary compliances by the suppliers before releasing their payments. Revisiting existing contractual clauses, seeking proper documentation in the form of undertakings/indemnities from the vendors ensuring proper compliances, vendor profiling to identify the non-compliant vendors are some of the critical steps that should be taken by the businesses to safeguard themselves from any future liabilities in the form of denied input tax credits. Training of the relevant stakeholders is also the need of the hour.

To sum up, a buyer who does not look out for the accurate compliances of his vendors will end up losing the benefits of eligible input tax credit.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Geetika Shrivastava

Executive Partner, Tattvam Advisors

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