Linking GSTR 1 and GSTR 3B Going the auto-population way

In the 39^th GST Council meeting held on 14th March 2020, among the numerous changes and recommendations, suggestions were made to improve the existing GST Return filing system namely, forms GSTR 1 and GSTR 3B. These suggestions were made in order to smoothen the transition to the new return system which were postponed to 1st October 2020.

Auto-population – An important feature of the new returns

The process of the new returns is mainly dependent on ‘auto-population’. All the data that is uploaded in the annexure (GST ANX-1) for outward supplies, will be auto-populated in the main return i.e. GST RET-1 or GST-RET 2 or GST RET-3. Similarly, credit filed in GSTR 2A by the suppliers will also be auto-populated after any of the actions of, ‘accept, reject or keep pending’ are selected. Once the figures are entered in the annexures (by way of uploads or otherwise), the same will be auto-populated in the main return.

Existing returns are not interlinked

Keeping in mind the auto-population of the new returns, it can be observed that the existing returns of GSTR 1, GSTR 3B and GSTR 2A (available for viewing only) are not interlinked in any manner. Let us see how:

GSTR 1 which is filed by the 11^th of the next month (for taxpayers with turnover greater than 5 crores) and end of the month following the quarter (for taxpayers with turnover less than 5 crores), is a return for outward supplies where none of the figures in any of the fields are carried forward to other returns. None of the figures are linked with GSTR 3B.

GSTR 3B which is filed by the 20^th of the next month, is a summary return declaring the liability, input tax credit and payments/set-off required to be made by a taxpayer. There is no linking between figures filed in GSTR 1 and figures of GSTR 3B. None of the figures are auto-populated.

GSTR 2A which is available only for viewing is based entirely on the data filed by suppliers. No information is flowing directly from GSTR 2A to GSTR 3B. It is used only to view the available credit and to create manual reconciliations offline.

GST Council suggestions

Unlike the existing GSTR 1 and GSTR 3B returns, the new returns are more connected in a way to ensure that the errors are least and that no mistakes can be made either intentionally or unintentionally.

So, in the 39^th GST Council meeting it was suggested that to smoothen the implementation of the new return system and to ensure the preparedness of the taxpayers, transitions should be made incrementally. Also, to reduce the problem of tax evasion and gaming of the system, it was suggested that, the existing systems should be improved in terms of compliance. Hence, the following two important suggestions were made:

1. Linking of GSTR 1 and GSTR 3B

If outward supplies in FORM GSTR-1 are linked to the liability in FORM GSTR-3B, the implications will be as follows:

Errors will reduce drastically – There is no linking in the existing return system due to which errors persist. Due to manual intervention, there are cases where sales are considered in GSTR 3B, however, they are unintentionally left out in GSTR 1 and filed in the next month’s GSTR 1 return. On the other hand, sales are correctly disclosed in GSTR 1, however, inadvertently excess sales turnover in disclosed in GSTR 3B. For instance, there are cases where Rs. 1,00,000 has been erroneously entered in GSTR 3B as Rs. 10,00,000.

Manual intervention to resolve differences will reduce – The ‘Credit and Liability Statement’ available on the GST portal gives an overview of the differences between the liabilities declared as per GSTR 1 and GSTR 3B, however, these differences are currently being resolved manually.

Reduction in tax evasion – Invoices uploaded and liability declared in GSTR 1 will have to be mandatorily paid for in GSTR 3B thereby reducing tax evasion.
Reduction in time in filing GSTR 3B – Since the outward supplies data and the input tax credit will be auto-populated, the time taken to file GSTR 3B will reduce.

2. Linking of GSTR 3B and GSTR 2A

If input tax credit in FORM GSTR-3B is linked to the details of the supplies reflected in the FORM GSTR-2A, implications will be as follows:

Compliance with Rule 36(4) – As per Rule 36(4) of the CGST Rules, 2017 (applicable w.e.f. 1^st Jan 2020), credit is restricted to 110% of the eligible credit available in GSTR 2A. Due to lockdown, this rule has been relaxed, however, it has to be cumulatively complied for the months of February, March, April, May, June, July, August and September, in the returns of September 2020.

Increase in the working capital needs of taxpayers – Excess credit apart from the 110% will not be allowed in a particular month due to auto-population thereby increasing the working capital needs of taxpayers.

Timely filing of GSTR 1 – Suppliers will be forced to ensure timely filing of their GSTR 1 returns so that recipients who are their customers are not deprived of credit.

Reconciliations will become less cumbersome – Maintaining manual reconciliation between credit as per GSTR 3B and as per GSTR 2A will be less cumbersome.

Manual entry for credit on import of goods as well as the import of services – Credit available on import of goods might not be linked in the beginning and will have to be entered manually. The same is with the import of services.

The linking of these returns might solve issues and might also lead to new ones. However, one thing is clear that instead of changing the return system overnight, we’re making transitional changes that are preparing us for the new system. It’s a welcome move and in the council meeting, the date for linking these returns has been set as 31^st July 2020. However, we might see a delay in this date as the entire country is in a lockdown.