Internal Controls for Compliance with Rule 37A
Jagrit Tenani
CA Jagrit Tenani has emerged as a seasoned professional in the domains of Risk-Based Audit, SoP Formulation and Implementation, Internal Audit, Statutory Audit, and Goods and Services Tax (GST).
His experience in the Corporate Audit Department of ITC Ltd. encompassed him with a keen awareness of the critical role that stringent internal controls play in ensuring organizational excellence and compliance.
Introduction:
Rule 37A requires recipients to reverse input tax credit (ITC) if the supplier fails to file GSTR-3B for the relevant month by November 30th of the next fiscal year (FY). To avoid interest costs, this reversal must be performed in the October return, but no later than November 30th. Once the supplier submits GSTR-3B, the ITC can be reclaimed.
Organizations must ensure compliance with Rule 37A to avoid financial penalties, interest costs, and reputational problems. These controls constitute an organized strategy for monitoring compliance, reducing manual errors, and ensuring that the organization’s financial activities comply with tax requirements.
How Organizations View Compliance with Rule 37A:
1. Compliance as Risk Control:
Companies use Rule 37A as a risk management tool to avoid:
a. Avoidance of penalties.
b. Prevention of interest charges
c. Disallowance of ineligible expenses
d. Reduction in tax litigation risk
e. Larger organizations frequently incorporate Rule 37A within their internal audit scope and risk registers.
2. Operational Efficiency Focus:
a. To manage Rule 37A inspections efficiently, organizations often incorporate automated systems.
b. Compliance is seen as a way to reduce manual labor, minimize errors, and streamline procedures.
c. To avoid last-minute scrambles during tax filing, many businesses opt to automate deductee verification monthly.
3. Reputational Viewpoint:
a. Organizations with robust governance frameworks are wary of their public image and interactions with tax authorities.
b. Compliance with Rule 37A is regarded as an effective way to demonstrate that a company is adhering to regulations.
4. Vendor Management Angle:
a. Many firms use Rule 37A compliance as a management mechanism to monitor vendor discipline.
b. If suppliers don’t adhere to compliance rules, some businesses might refuse to pay them or postpone vendor onboarding.
5. Audit and Certification Readiness:
Businesses are aware that during tax audits, statutory auditors verify Rule 37A compliance.
a. Mandatory audits.
b. Internal examinations.
Clean audit reports and the avoidance of qualifications are made possible by appropriate controls.
Integration of Rule 37 of GST with IMS
Invoice Management System: The GST Invoice Management System (IMS) is a digital platform for managing and reconciling inward invoices from suppliers. IMS allows taxpayers to accept, reject, or mark pending invoices depending on the legitimacy and receipt of goods or services.
How Rule 37 relates to IMS:
- IMS offers visibility into invoice status: Taxpayers can follow and verify invoices as well as their payment status by viewing them on a dashboard.
- Timely action facilitation: Taxpayers can act on bills before payment deadlines (180 days) to avoid the ITC reversal required by Rule 37.
- Prevents wrongful ITC claims: IMS helps to avoid claiming ITC on underpaid or disputed invoices, in accordance with Rule 37’s requirements.
- Supports communication between recipient and supplier: If invoices are rejected or marked as pending, the supplier is notified so that any inconsistencies can be resolved as soon as possible.
How Rule 37 can be integrated with IMS:
- IMS automatically integrates supplier-filed invoices in GSTR-1, GSTR-1A, or the Invoice Furnishing Facility (IFF) into the recipient’s dashboard upon upload.
- Invoice Action Workflow: Recipient taxpayers can take invoice-specific actions (accept, reject, pending) directly through IMS. These actions are immediately reflected in the system and affect eligibility for ITC claims in GSTR-2B and GSTR-3B.
- IMS can integrate with payment data from ERP or accounting systems to monitor invoice payments within 180 days. Rule 37 enables automated alerts to notify taxpayers of upcoming payment deadlines.
- IMS automatically updates invoices with supplier revisions, including errors and credit notes, and recalculates ITC eligibility accordingly. This avoids mistakes caused by stale or erroneous invoice data.
- Automated ITC Reversal: If payment is not paid within 180 days, IMS can identify invoices that require ITC reversal in GSTR-3B and notify or alter claims to ensure compliance without manual tracking.
Steps to Ensure Compliance with GSTR-3B Filing for Input Tax Credit (ITC):
Step 1: Identify Noncompliant Suppliers:
a. Action: Check your GSTR-2B for September 2024 to identify vendors who have not filed their GSTR-3B.
b. The purpose of GSTR-2B is to provide a static statement of applicable ITC based on the filings of your suppliers. If suppliers have not filed GSTR-3B, their invoices will not appear on your GSTR-2B.
c. Goal: Create a list of such suppliers, as ITC from non-filers is not permitted under Section 16(2)(aa) of the CGST Act.
Step 2: Follow-Up With Suppliers:
a. Contact these providers before submitting your October 2024 GSTR-3B.
b. Purpose: To remind them to file their GSTR-3B and ensure that their invoices are reflected in your GSTR-2B.
c. The goal is to prevent unnecessary ITC reversals and mitigate cash flow concerns by encouraging supplier compliance.
Step 3: Reverse ITC on October GSTR-3B if not filed:
a. Action: If any suppliers have yet to file GSTR-3B by the time you file your October 2024 GSTR-3B, you must temporarily reverse the ITC in Table 4B(2).
b. Purpose: It is a legal necessity to reverse ineligible ITC until the supplier files a
c. Effect: This prevents the claiming of ineligible credit, which could lead to interest liabilities or penalties during audits.
Step 4: Reclaim ITC Following Supplier Compliance:
a. Action: Once the supplier files their pending GSTR-3B, you can reclaim the ITC in the future.
b. To report recovered ITC, use Table 4B(5) of GSTR-3B (formerly reversed).
Also, reveal it in Table 4D(1) (reversal of reclaimable ITC).
c. Goal: To ensure transparency and compliance with GST regulations by accurately tracking ITC reclaims.
Conclusion:
Businesses can prevent fines, interest, and spending disallowance by adhering to internal controls such as prompt reconciliation, appropriate documentation, and routine verification. It lowers financial risks, encourages accuracy in tax returns, and facilitates cordial interactions with tax officials. Businesses regard it as an essential element of sound corporate governance, contributing to both reputational and financial integrity. A key element of ethical and sustainable corporate operations, effective compliance procedures also increase operational effectiveness and audit readiness.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
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