India’s Goods and Services Tax (GST) system includes a feature known as Input Tax Credit (ITC). This mechanism allows businesses to avoid paying tax on inputs where tax has already been paid, thereby reducing their overall tax burden.
However, since companies must comply with specific rules and deadlines, they often face challenges in consistently monitoring their ITC.
Here, GST software becomes essential as it supports automating the procedure, which facilitates businesses to stay compliant with the tax requirements.
Input Tax Credit (ITC)
Input Tax Credit permits businesses to claim a credit for the GST paid on their purchases (inputs) and adjust it against the GST liability on sales (outputs). For instance:
- A wholesaler buys raw materials worth ₹1,00,000 and pays 18% GST (₹18,000).
- The wholesaler sells the finished goods for ₹1,50,000, charging 18% GST (₹27,000).
- While filing returns, the wholesaler can set off the already paid ₹18,000 against the output tax of ₹27,000.
- Net GST liability = ₹27,000 – ₹18,000 = ₹9,000.
It ensures tax is imposed merely on the value addition, not on the total turnover.
Reason for Challenging ITC Tracking
The concept seems easier, though its practical application is intricate. Below are the cited issues-
- Invoice Matching: Businesses can merely claim ITC if the supplier has filed their GSTR-1 and the invoice reflects in the recipient’s GSTR-2B.
- Timely Filing: ITC can get blocked if there is a delay in filing by the suppliers.
- Ineligible Credits: There is no ITC on specific goods and services (like personal use or exempt supplies).
- Reconciliation: Businesses should reconcile purchase records with GSTN data monthly.
- Frequent Changes: A higher compliance is mandated by Amendments and government notifications.
Errors may occur if manual tracking is there, and penalties or blocked credits might be the outcomes.
In what way does GST Software Simplify ITC Tracking
The modern GST software solutions are made to automate and ease the ITC compliance. Below are the measures to manage he process-
Automatic Import of Data from GSTN
The software retrieves invoices submitted by suppliers from the GST portal (via GSTR-2B/2A). Businesses with this can have the most up-to-date data without manually downloading spreadsheets.
Invoice Matching and Reconciliation
GST software has one prominent feature, i.e, its automatic invoice matching ability. It compares the entered purchase invoices by the businesses with the data uploaded by the suppliers. If there is any mismatched or missing invoices, then they shall be flagged for review.
Example: A business records an invoice from Supplier A for ₹50,000 + 18% GST (₹9,000). The software verifies with GSTN data:
If Supplier A has filed it, the ITC of ₹9,000 is marked as available.
If not, it is flagged as “pending,” and the business knows it cannot claim ITC until the supplier files.
Classification of Eligible and Ineligible ITC
The credits that are not eligible for the GST statutes, like motor vehicles for personal use and club memberships, shall automatically be separated by the system. The risk of wrong claims and penalties will then be reduced.
Real-Time ITC Availability Dashboard
GST software delivers a clear dashboard that displays:
- Total ITC available
- ITC claimed
- ITC blocked/pending
- ITC utilisation in returns
Businesses can forecast their tax obligation appropriately from this.
Automated Return Filing (GSTR-3B & GSTR-9)
The software transfers the eligible credits into GSTR-3B as the ITC details are already tracked. ITC reporting in the annual returns (GSTR-9) will also get streamlined at the end of the fiscal year.
Vendor Communication Tools
Concerning non-filing, certain advanced GST software features automate the reminders for the vendors. The system can generate alerts or send automated emails to request timely filing if the supplier is unable to upload the invoices.
Practical Example of ITC Tracking with GST Software
Let’s say a company, ABC Traders, purchases goods of ₹2,00,000 with 18% GST (₹36,000) from multiple suppliers. Below is the explanation about how GST software manages ITC:
- Data Import: The software imports purchase invoices uploaded by suppliers on GSTN.
- Reconciliation: Out of ₹36,000 ITC, ₹30,000 is matched with suppliers’ filings. ₹6,000 is flagged as pending since one supplier hasn’t filed.
- Eligibility Check: Out of the matched ₹30,000, the software detects ₹2,000 ineligible credits (say, for staff refreshments).
- Final Claim: Eligible ITC available = ₹28,000. This is auto-populated in GSTR-3B.
- Pending Credits: The remaining ₹8,000 (₹6,000 unmatched + ₹2,000 ineligible) is tracked separately for future reconciliation.
ABC Traders, without automation, need to manually reconcile all invoices and risk misreporting. The process is streamlined and error-free with the assistance of the GST software.
Benefits of Using GST Software for ITC
- Time-Saving: Lowers manual reconciliation work.
- Accuracy: Reduces human error in ITC claims.
- Compliance Ready: Automatically updates with GST law changes.
- Transparency: Furnishes a clear audit trail of ITC usage.
- Cash Flow Management: Supports the business in planning for the working capital by forecasting net tax liability.
Closure: For businesses dealing with GST, tracking Input Tax Credit (ITC) is crucial for effective tax management and compliance. Manually managing this process is impractical due to the volume of transactions and the stringent regulations involved. Utilising GST online software can simplify this process, ensuring that businesses can claim all eligible tax credits without facing compliance issues.
The reliable GST software is crucial to ensure everything is accurate, working efficiently, and ultimately saving money.
