Avail ITC in GST as per Section 16(2)(aa)

From 1st January 2022 onwards, businesses must claim Input Tax Credit (ITC) that only appears in GSTR-2B. With this, Rule 36(4) of the CGST Rules loses its purpose while the new clause (aa) under Section 16(2) comes into force. This article provides complete details about the change, how this change affects businesses, and how businesses can be prepared with Clear’s solutions.

Latest Updates

Budget 2025
1st February 2025
1. Amendments in Section 34 of the CGST Act, 2017: The FM amended the Proviso to sub-section (2) to explicitly provide for the requirement of reversal of corresponding ITC in respect of a credit-note. It means if the supplier issues a credit note to reduce their tax liability, the recipient must reverse the corresponding ITC, if already availed. 

2. Amendments in Section 38 of the CGST Act, 2017: Section 38(1) is being amended to omit the expression "auto-generated" indicating that the ITC statement i.e. GSTR-2B may no longer be entirely system-generated. Businesses may now need to validate and reconcile invoices and ITC through the Invoice Management System (IMS) rather than relying solely on system-generated data. Also, a new clause (c) to sec 38(2) is added, allowing the government to specify additional details in the ITC statement through rules.

What does the new clause (aa) under Section 16(2) state?

The CBIC has notified 1st January 2022 that the new condition in clause (aa) of Section 16(2) of the CGST Act will be implemented. It issued Central Tax notification number 39/2021 on 21st December 2021 to give effect to Section 109 from the Finance Act, 2021, containing this addition. 

Section 16(2) of the CGST Act contained conditions for recipients to fulfil before claiming ITC in their GSTR-3B. These included possession of a GST invoice, receipt of the goods or services, tax on it paid to the government, and GST invoice reported in GSTR-3B. 

The recently added condition allows you to avail ITC if your vendor declares that invoice or debit note in their corresponding GSTR-1 or Invoice Furnishing Facility (IFF). It must finally be found in your returns auto-generated under Section 38, such as GSTR-2B. It is a possible return instead of GSTR-2A due to its static nature and availability every month or quarter in line with GSTR-3B. 

The GST Council suggested an amendment to Rule 36(4) during the 45th meeting in September 2021. The amendment was notified on 29th December 2021 through the Central Tax notification no. 40/2021 to add the same condition that clause (aa) of Section 16(2) stated.

Impact of removing provisional ITC and how businesses can handle ITC?

The businesses will have additional responsibilities with the removal of this benefit. They will also face fresh challenges that can be addressed only with tech intervention. 

Any extra ITC claims and failure to comply with this new condition will leave your business liable to penalties or GSTIN getting suspended. If businesses fail to act sooner, it may lead to suboptimal ITC claims, negatively affecting its profitability and, in turn, its working capital. 

Although many businesses know the importance of frequent reconciliation, they depend on the 5% extra ITC every tax period. Currently, enterprises undertake reconciliations not very frequently or near the due date of returns. But from 1st January 2022, if you continue with this, it leaves businesses with no time for vendor communication and follow-ups for missing invoices.

Henceforth, ITC reconciliations should become dynamic, real-time, per payment cycle, preferably weekly or multiple times a week. You will notice that the manual route is complex, tiring and time-consuming.

Businesses generally reach out to their vendors on an ad-hoc basis or quarterly. It happens on phone calls, messages or emails. But these are detached from the ERP, so tracking becomes difficult. In the future, businesses must follow up with the non-compliant vendors in real-time and consistently nudge them to upload invoices. 

Holding payments of total invoice dues or GST amount can be adopted for driving non-compliant vendors once a quarter or year. However, companies did not implement vendor grading and strategies for fast uploading invoices. Payment for invoices not uploaded should always be tagged as “Hold GST until matched” when the invoice does not appear in GSTR-2B before the 14th of the month succeeding the quarter.

After this change, businesses must discipline defaulting vendors by holding payments at the invoice level and more often, particularly for the GST amount. 

How do GST solution by Clear help businesses with this change?

Every business needs a tech-based system to reconcile their purchase invoices frequently to identify missing tax credits. Enterprises must switch to cloud-based software solutions fueled by artificial intelligence and machine learning. They must adopt a reliable system for two-way vendor communication in real-time, vendor compliance grading and automatically block payments.

Increased support cannot be expected from vendors since you are at risk of losing tax outflows if they fail to upload invoices. If vendors delay, enterprises will bear additional GST in cash until they comply. Hence, you can avoid the challenges by following the recommended actions. 

At Clear, we have prepared you for this change! We migrate the ITC claim action to ERP irrespective of the GSTR-2A or GSTR-2B reconciliation on the Clear's GST solution.

We have configured the GSTR-2A vs Purchase Register(PR) tool for automating payment blocking in your ERP. Clear recommends using the GSTR-2B vs PR tool for accurate ITC claims on the Clear's GST tool. You may also use the vendor portal for two-way communication with vendors, available on GST solution by Clear.

Also, our Advanced reconciliation tool, easy vendor communication, 25+ comparison reports on Clear's GST solution help tax professionals and business owners solve the issues caused by the change.