Goods and Services Tax (GST) has brought a big change in the Indian Taxation system.
In fact, it played a major role in simplifying and preparing a proper framework of indirect taxes. However, although GST has streamlined the taxation process, it is still hampering businesses with one big challenge: blocked credit.
Moreover, blocked credit impacts the business in a severe manner. This, in turn, directly affects their cash flow, which ultimately hinders business operations and growth. In this article, we will explore how businesses can avoid blocked credit. We will also learn about various strategies, procedures, and tips to ensure that businesses remain in the GST regime and don’t face blocked credit.
| Type of Blocked Credit | Explanation |
| On Goods and Services Used for Personal Consumption | Goods purchased by taxpayers used for personal consumption like food, travel, and accommodation are not eligible for ITC |
| On Goods and Services used for Exempt Supplies | If a taxpayer purchases goods or services for making exempt supplies like education, healthcare then it can’t be claimed |
| On Goods and Services used for non-business purposes | Goods and services purchased by taxpayers for non-business purposes like hobby, personal use etc can’t be claimed for ITC |
| Blocked on certain Goods and Services | There are certain goods and services which are not eligible for ITC. These include motor vehicles, construction of immovable property, outdoor catering, beauty treatment and health services |
Avoiding blocked credit in GST
Businesses running under the GST regime are often prone to the concern of blocked credit. Specifically, blocked credit is a scenario under which the taxpayer is not able to claim input tax credit (ITC) on GST payments made for inputs or input services.
Following GST regulations in a proper manner becomes necessary to avoid such roadblocks. Here are certain key ways in which blocked credit can be avoided: –
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Maintaining Accuracy in Documentation
One of the primary reasons for blocked credit is inaccurate documents. So, the businesses shall first of all see to it that they are maintaining accurate documents.
They must ensure that they record invoices, bills of supply, and relevant documents correctly.
Otherwise, if they miss anything in these documents or find any discrepancies, it can lead to blocked credit concerns.
Accuracy in documentation also protects audits and avoids disputes.
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Filing of Returns on Time
Timeliness plays a big role in GST compliance. Filing the returns on time is a proactive step that can prevent your business from blocked credit. Otherwise, late filings can result in penalty charges. Moreover, there are also many concerns related to credit.
Therefore, businesses must ensure that filing happens on the proper due dates. By doing so, they can reduce the occurrence of blocked credit.
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Compliance with Anti-Profiteering Regulations
Apart from financial implications, businesses shall also comply with anti-profiteering regulations. They shall not refrain from passing on the benefits of reduced tax to customers.
If a business doesn’t comply with this then this can lead to penalties and can lead to blocked credit. Therefore, it is a moral responsibility to align the pricing strategies with GST provisions.
Strategies to prevent blocked credit claims
If the business is unable to claim Input Tax Credit (ITC) then it may affect its financial planning and operational efficiency. Therefore, it is crucial to have a proactive strategy formulated to prevent blocked credit claims. In addition, here are some of the key strategies that a business can apply to reduce the risk of blocked credit.
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Vendor Verification
Business can’t run alone but has tie-ups with various vendors and suppliers. Before getting into agreement with them go for a proper verification. You need to ensure that the vendors are properly following GST compliance. This will help in building a reliable supply chain and reduce the risk of credit issues.
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Internal Audits
Regular internal audits are a must in the business. This will reduce the errors and discrepancies and hence curb the occurrence of blocked credit. Additionally, businesses shall prepare a system plan to review financial records, reconcile input and output tax, and identify future errors. As a result, this will ensure the accuracy of GST returns and reduce the probable chances of blocked credit.
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Employee Training
The accounting staff of the company plays an important role in reducing credit concerns.
They must ensure they record invoices, bills of supply, and relevant documents correctly. If they miss any details in these documents or find discrepancies, they will face blocked credit concerns.
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Being Updated to GST Amendments
The government frequently brings amendments to GST regulations and compliance. Therefore, businesses must stay updated about these changes. By adapting to the evolving business processes, they can prevent blocked credit concerns.
Unblocking credit in GST procedures
Blocked credit in GST can take place due to a variety of concerns. Among these, compliance is a major concern. In many cases, companies fail to maintain proper compliance with GST regulations, which leads to non-approval of credit claims. Let’s now explore how to unblock the credit in GST procedures.
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Addressing Mismatched Invoices
Dealing with mismatched invoices plays an important part in unlocking credit. Discrepancies in various details like invoice numbers, GSTIN, and values between supplier and recipient invoices can lead to claim rejection. They can initiate proper invoice reconciliation to prevent this.
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Communication and Collaboration
Proper communication and collaboration are a must between businesses, suppliers and recipients to resolve blocked credit issues. If they maintain transparency, they can track and rectify concerns faster. This can help in early detection and resolution of discrepancies.
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Government Support and Initiatives
Government support and initiatives have a great role in facilitating unblocking of credit. The government every now and then introduce various policies and initiatives that simplify the GST process. Keep yourself updated with this and align the same in businesses. Also, you can make use of government-supported platforms to make the credit unblocking process more efficient.
Tips for minimizing blocked credit issues
It’s necessary for businesses to reduce their blocked credit issues in the GST eco-system so that businesses can flourish and earn good profits. Here are some tips that can help to minimize the blocked credit issues
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Technology Intervention
People use technology in everything these days. GST is not far away from this. You can install GST compliance software in your business.
This will automate the GST return filing process and also give accuracy in calculations. The chances of manual errors decrease due to technology which is the major cause of blocked credit.
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Regular Audits and Reviews
You should conduct regular internal audits. Track and rectify issues if found soon to avoid blocked credit issues in future. This approach will help businesses from any compliance issues in future.
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Reconcile Books on a Regular Basis
Reconcile the books of accounts with GST returns on a regular basis. This will ensure that the input tax credits match the numbers of GST returns. If any discrepancy then can be located easily and rectified.
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Compliance with GST Rules
One needs to stay updated with changes that take place in GST rules and regulations. Non-compliance of the same can lead to blocked credit. Train your staff so that they are aware of updates and don’t make any mistakes.
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Take the help of Professionals
You can take the help of professionals. Collaborate with tax experts and GST consultants to ensure proper GST compliance. They can help you to navigate the complexities of GST regulations.
GST credit eligibility best practices
GST is a consumption-based taxation system which has been adopted in numerous countries. An important aspect of GST is the provision of GST credits. This allows the businessman to claim credit for GST paid on their purchases. To ensure that the GST credit claim goes in a proper manner a business need to follow certain eligibility best practices. They are as follows: –
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Maintenance of Proper Records
The first and foremost thing is proper maintenance of all records. You must maintain a detailed record of all transactions with accuracy. This is very important for GST credit eligibility. A business shall have proper documentation of purchase and sales which includes invoices and receipts. This will help to maintain GST regulatory requirements and also verify GST credits.
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Credit Claims shall be for Related Business Activities
Businesses shall ensure that the GST credit claimed is related to business activities. Avoid any personal or unrelated expenses when making GST credit claims. This will smoothen the integrity of the GST system. In addition to this, it will also restrict any occurrence of disputes with tax authorities.
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Matching Input and Output Credit
Develop a practice to reconcile input tax credit with output tax payable daily. If you find any discrepancy during this process, address and rectify it immediately. This will maintain eligibility for getting credit.
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Invest in Internal Control
Implementing a good internal control system is essential to monitor and validate GST credit claims. To achieve this, establish a proper reconciliation process. Internal audits also play a good role in reducing the discrepancies. This proactive approach reduces the chances of getting blocked credit.
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Communication between different Departments
Collaboration and communication within various departments of business is also a very good practice to adopt. The finance, sales, procurement and operations teams need to work in coordination to ensure that the GST claim is approved.
Common pitfalls to avoid in claiming GST credit
Businesses shall have proper knowledge about the pitfalls that may lead to blocked credit. Here is the list of some of the common pitfalls: –
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Non-compliance with Time-limits
GST regulations expect that businesses complete tasks on time. Timely deadlines have been specified for actions like filing returns, rectification of errors and other such actions. If you don’t comply with this then it may lead to penalties and blocked credit.
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Mismatch in Returns
If there is a mismatch found in auto-generated GSTR-2A and self-declared GSTR-3B then it can result in blocked credit. So, take care to reconcile this on a regular basis.
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Claiming Credits on Unrelated Expenses
Business expenses and personal expenses shall properly be differentiated before filing GST returns. Because this can lead to blocked credit. A clear policy shall be framed which identifies and eliminates non-business expenses. This will ensure that the businesses don’t claim credits for ineligible transactions.
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Good Reconciliation Process
A good reconciliation process needs to be implemented to tally the claim credit with business transactions. Lack of proper internal control can lead to errors.
Conclusion
To reduce the possibilities of blocked credit in GST, one must be very proactive. For this, a business shall have proper documentation, regular compliance and good communication between departments. By following the strategies given in this article the risk of blocked credit can be reduced.
Frequently Asked Questions
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What is blocked credit?
The input tax credit that cannot be claimed by the taxpayer under the GST regime is considered a blocked credit. In addition, there are certain goods and services defined as blocked credits. As a result, input tax credit can’t be claimed on these specific goods and services.
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How do I check my blocked credit on the GST Portal?
To check the blocked credit on the GST portal you need to click on the Services section first. Then go to Ledger. Under this, you will find the Electronic Credit Ledger option. Here you will find the blocked credit.
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Does food come in the blocked credit category?
Yes, the input tax credit on food and beverage supplies are blocked for registered person. However it has certain exceptions as per GST regulations.
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How can I avoid blocked credit?
Have a proper understanding of the GST regulations. Gain knowledge about which items lead to blocked credit. This will help you to proactively avoid them.
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How often shall I reconcile my input tax credit (ITC) to avoid blocked credit?
You need to undertake regular reconciliation of ITC to identify discrepancies and get it rectified. Additionally, this proactive action will reduce the credit blocks
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How do I reverse the blocked credit in GST?
In a scenario where a business wrongly claims input tax credit, it must reverse the claim by making the payment to that extent in the coming month.
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Is Beauty treatment considered to be a blocked credit?
Yes, ITC on GST paid for beauty treatment is considered as blocked credit.
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Can Input Tax credit be claimed on food and beverages?
Input tax credit on food and beverages comes under the blocked credit category. However they are eligible for a claim if they are supplied as a part of a taxable supply of goods and services. Additionally, they can claim if they use those goods and services for making further supplies.
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How does Block credit impact taxpayer’s GST liability?
The blocked credit amount doesn’t reduce the taxpayer’s GST liability. In fact, the taxpayer will have to pay GST on the blocked amount.
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Which Section of GST is related to blocked credit?
Section 17 (5) of the CGST Act is related to blocked credit. It specifies the purchases that cannot claim the ITC.
