This discrepancy is raised in the scrutiny Notice when the GST Officer finds that, in FY 2017-18, the ITC availed and Utilized in GSTR 3B is very high and cash paid in GSTR 3B is very less or Nil.
It is estimated that many tax payers are availing ITC to the extend of 85% to 100% of output tax. It is a disturbing situation for the Government. But there are genuine reasons for such huge availment of ITC.
Therefore, when you get a scrutiny Notice with this discrepancy, you should properly analyse the reason for that and give proper and convincing answer. If you find that you have availed excess ITC or availed ITC by mistake, then, take immediate steps to pay such ITC immediately so that you can avoid the penalties.
Let us look at the possible reasons for such huge availment of ITC.
1. If you start a new business in FY 2017-18, you purchase a lot of raw materials (inputs). You avail full ITC of such raw materials in the Year of purchase. However, a major portion of the stock may be remaining as closing stock as on 31.03.2018 in your balance sheet. You can see that the Opening stock in this case is Nil and Closing stock may be very high. (This you can support with the balance Sheet for the FY 2017-18)
2. Similarly, if you start a new Business in FY 2017-18, you purchase several Capital goods (Fixed Assets) for your business purposes. You would have availed full ITC on such Capital Goods in the year of purchase itself. (This you can support with the Fixed Asset Schedule in your Balance Sheet and the copies of invoices of Fixed Assets).
3. The Tax rate of inputs, input services and Capital Goods may be higher than the tax rate applicable for the Turnover. Suppose, the tax rate of inputs are @ 18% and outward supplies are taxable @ 12% or 5%, then, there will be excess utilisation of ITC. You should determine the tax rates of all types of inputs, Input Services and Capital Goods and compare it with the tax rates applicable for turnover. If you are dealing in more number of items, prepare a table of purchases and sales with item wise tax rates. So that you can give proper explanation tot he scrutiny notice.
4. If the margin of your business is very high, you would have paid major part of your output tax by utilising cash. If your margin in your business is very less or negative, then, you will be availing more ITC and cash utilization will be lower or Nil. You can compare your Gross Profit Ratio of FY 2017-18 and compare this GP Rate with GP rate of earlier Years. If your GP rate in FY 2017-18 is less as compared to earlier years, you can give that reason in the reply to the scrutiny notice.
5. If your stock is damaged in flood or other natural calamities in FY 2017-18, then, you would have sold the damaged goods at a heavy discount. Your margin in business will be lower in such a situation.
6. Sometimes, you would have availed ITC on motor vehicles on cars or other passenger vehicles which area blocked Credit as per Section 17(5).
7. Please check whether your outward supplies are fully taxable or not. In many cases, only a portion of your turnover is taxable and the balance is exempted sales. Sometimes you would have availed fully ITC and, by mistake, taken ITC even on inputs and Capital Goods which are used for exempted outward supplies. As you are aware, common ITC is to be proportionately disallowed. If you fail to do this, your ITC availment and Utilisation will be high.
8. Please Check whether you have availed any TRAN Credit, by mistake.
9. Compare your ITC reported in your GSTR 2A and ITC availed in your GSTR 3B to make sure that there is no much difference. (Generally, the level of difference is less than 10% in most of the case). Many of our problems can be easily located by comparing the data in GSTR 2A with ITC in GSTR 3B. I have seen many cases where buyers have invoices in which either their GST Number is missing in the invoices or the GST Number is invalid or wrong.
10. It can be seen that the tax rates of many goods and services are reduced by Government based on the recommendation of GST Council. At the time of introduction of GST on 01.07.2017, many of the Goods were in high tax bracket and later the tax rates were reduced. In such cases, since your purchases are at higher tax rate and sales will be at a lower rate, it may be one of the reason the high availment of ITC.
11. There may be other reasons also which are applicable to your business. So, make a thorough study of it and seek the help of your auditors, if needed.
Based on above analysis, find the exact Reason for the scrutiny notice. Prepare a Table to explain to the maximum to the officer.
Don't give vague answers without Proper home work from your end.
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