Input Tax Credit Leakage: The Procurement Control Owners Overlook

A buyer in a Rs 400 crore business will spend two weeks arguing over a 1.5 per cent reduction in rate. In the same fortnight, the company can lose more than that on the same purchase — because the supplier did not file his return, or because payment went out on day 210 instead of day 170. Goods and services tax credit is priced into every quotation you accept. When the credit does not arrive, procurement has overpaid, whatever the negotiated rate said.

Input tax credit leakage begins at the purchase order

Credit under GST is only as reliable as your vendor's compliance. It is available to you only when the supplier has reported the invoice and it has been communicated to you. Your GSTR-2B is assembled from what suppliers file and from the action you take on the Invoice Management System on the portal — and records left unattended are treated as accepted, which is a quiet way of absorbing somebody else's mistake.

That makes this a procurement decision. The point at which a credit becomes safe or unsafe is the point at which the vendor was chosen, not the point at which the accountant reconciles four months later.

Ask your CFO for one number: the value of input tax credit unreconciled for more than 90 days, broken up vendor-wise. If nobody can produce it within a day, the reconciliation is not being run as a control.

The 180-day rule that turns a payment delay into a cost

Credit taken on a purchase must be reversed if you have not paid the supplier the value of the supply together with the tax within 180 days of the invoice date. The reversal goes into the return for the period in which the 181st day falls, and it carries interest. The credit can be taken back once payment is made, but the interest is not refunded.

In an owner-managed business that stretches creditors to manage cash, this is a real cost that never appears as a line item. Two reports settle it:

• creditor ageing built on invoice date, not on the date of the accounting entry

• a standing list of invoices crossing 150 days, circulated before they cross 180

Retention money and quality holds deserve a separate look. Where you have withheld ten per cent pending performance, ask whether the reversal was worked out on the withheld portion.

There is also an outer limit. Credit relating to a financial year cannot be taken after the earlier of 30 November of the following year or the date of filing that year's annual return. An invoice discovered during the statutory audit is often already dead.

Some vendors cost more than they quote

Test your vendor base for:

• suppliers who file late or irregularly, quarter after quarter

• GSTINs suspended or cancelled while purchase orders remained open

• invoices appearing in GSTR-2B with a value, rate or place of supply different from your purchase record

• purchases from composition or unregistered suppliers compared, in the comparative statement, against the gross rate of a registered one

The last is the most common and the most expensive. If your comparative sheet compares gross quoted rates rather than cost net of available credit, the least compliant vendor will keep winning the order.

Controls worth building into the purchase process

• verify GSTIN status and filing history at empanelment, and refresh it annually for retained vendors

• provide in the purchase order that the tax component may be withheld until the invoice is reflected in your GSTR-2B

• send the monthly mismatch report to the procurement head, not only to accounts — the person who can call the vendor should own the exception

• treat repeated mismatch as a vendor performance failure, with escalation and, eventually, de-listing

The bottom line

• Credit lost is margin lost, and the loss is usually caused by a decision made in procurement.

• Ask for vendor-wise unreconciled credit older than 90 days, and for invoices past 150 days from invoice date. Two reports, once a month.

• Compare vendors on cost net of credit, not on quoted rate.

• Compliance history belongs in vendor empanelment, alongside price and capacity.

By CA Dhruv Seth, Seth & Associates, Chartered Accountants, Lucknow

This article is for general information and does not constitute audit, legal or tax advice. Regulations change; please verify the current position or speak to a qualified adviser before acting.