Matching, Reversal, and Reclaim of ITC – Section 42 of GST

Section 42 of the CGST Act dealt with the matching, reversal, and reclaim of input tax credit (ITC). This provision was aimed at ensuring transparency and accuracy in ITC claims by reconciling the details of inward and outward supplies. However, this section was omitted with effect from 1st October 2022 via Notification No. 18/2022 – CT dated 28.09.2022, as per Section 107 of the Finance Act, 2022.

In this blog, we explore the original provisions of Section 42, its implications, and the reasons for its omission.

Understanding Section 42: Key Provisions

Before its omission, Section 42 played a crucial role in the ITC matching process. Here’s a breakdown of its key provisions:

1. Matching of ITC Claims

• ITC details furnished by a recipient were matched with the corresponding outward supply details provided by the supplier in his return.

• ITC claims were also matched with IGST paid on imports under Section 3 of the Customs Tariff Act, 1975.

• Any duplication of ITC claims was also checked.

2. Final Acceptance of ITC

• If ITC details matched with the supplier’s declared output tax or IGST on imports, the claim was finally accepted.

• The recipient would receive communication confirming the ITC acceptance.

3. Discrepancy in ITC Claims

• If the ITC claimed by the recipient exceeded the tax declared by the supplier or the supplier failed to report the outward supply, a discrepancy was communicated to both parties.

• Any duplicate ITC claims were also notified to the recipient.

4. Addition to Output Tax Liability

• If the supplier did not rectify the discrepancy in his return, the excess ITC claimed was added to the recipient’s output tax liability.

• Any ITC claimed due to duplication was also added to the output tax liability of the recipient.

5. Reclaiming ITC and Interest Liability

• If the supplier later declared the missing invoices, the recipient could reduce the excess tax liability.

• Interest paid on the wrongly claimed ITC would be refunded to the recipient.

• However, if any reversal was done contrary to the prescribed provisions, the recipient would have to re-add the amount to the output tax liability, along with interest under Section 50 of the CGST Act.

Why Was Section 42 Omitted?

The removal of Section 42 from the CGST Act was part of simplifying the ITC claim process. Here are the key reasons for its omission:

1. Complexity and Compliance Burden

   The ITC matching process was cumbersome and led to compliance challenges for businesses.

2. Practical Difficulties in Reconciliation

   Many suppliers failed to timely file returns, causing discrepancies for recipients.

3. Transition to a More Automated System

   The introduction of GSTR-2B (auto-drafted ITC statement) provided a better mechanism for tracking eligible ITC.

4. Simplification of ITC Provisions

   Section 16 of the CGST Act was amended to make ITC availability subject to GSTR-2B, reducing the need for manual matching.

Conclusion

Section 42 of the CGST Act was originally introduced to ensure that ITC claims were accurate, transparent, and free from duplication. However, due to practical challenges and evolving GST compliance mechanisms, it was omitted w.e.f. 1st October 2022. Businesses must now refer to GSTR-2B and Section 16 of the CGST Act for ITC claims instead of relying on manual matching.

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