The Indian GST framework has witnessed several iterations aimed at ensuring seamless reconciliation of Input Tax Credit (ITC). Historically, multiple attempts were made to implement a mechanism allowing recipients to verify, modify, or delete details of supplies reported by their suppliers. However, these attempts were not successfully integrated into the GST law, leading to various amendments.
A shift in approach has now led to the introduction of the Invoice Management System (IMS), which enables recipients to accept, reject, or keep invoices pending. While IMS is operational on the GST portal since October 2024, it is yet to be incorporated into GST legislation. The 53rd and 54th GST Council Meetings reaffirmed that IMS is a voluntary IT measure to aid credit matching and reconciliation, ultimately reducing ITC mismatch notices. However, the Finance Bill, 2025, proposes amendments to provide IMS a legal foundation.
Despite its intended benefits, a deeper examination raises critical concerns regarding its effectiveness and the resultant compliance burden on taxpayers.
IMS and Tax Invoices/Debit Notes an additional Compliance
Under the GST framework, ITC can be claimed only when invoices appear in GSTR-2B. Earlier, discrepancies between GSTR-2A and GSTR-3B led to numerous ITC mismatch notices. However, the introduction of Rule 36(4) in the CGST Rules, 2017, and Section 16(2)(aa) of the CGST Act, 2017, mandated reconciliation with GSTR-2B, significantly reducing such mismatches.
Since taxpayers are already reconciling their ITC Register with GSTR-2B, the IMS facility introduces an additional procedural step, thereby increasing the compliance burden. Notably, there is no penalty for not rejecting an invoice or debit note that does not belong to a taxpayer. This is because notices arise only when excess ITC is claimed in GSTR-3B beyond what is reflected in GSTR-2B, not when incorrect invoices remain unacted upon.
Additionally, IMS does not provide an option for recipients to manually add missing inward supplies not reported by suppliers. This one-sided reporting mechanism further complicates reconciliation, adding an unnecessary procedural layer without addressing core reconciliation issues.
The problem escalates when suppliers issue credit notes for incorrect invoices, leading to additional complexities in tax liability adjustments.
Challenges with Rejection of Credit Notes
One of the most significant operational issues with IMS is the handling of credit notes. Credit notes necessitate ITC reversal by recipients, making their rejection far more consequential than invoices or debit notes.
Key Challenges:
IMS does not allow recipients to mark a credit note as “pending.”
In cases where a tax invoice is nullified due to contract termination or errors, suppliers issue credit notes to correct their records. If a recipient rejects a credit note on IMS, it automatically increases the supplier’s tax liability in GSTR-3B of the subsequent month, despite no additional GST being payable.
Even if both the tax invoice and credit note are rejected together, the supplier’s liability still increases due to IMS’s auto-adjustment mechanism.
FAQs issued by GSTN (17.10.2024) suggest that incorrect invoices should be amended rather than corrected via credit notes. However, ambiguity persists regarding whether contract cancellations fall under this category.
The Advisory on IMS allows suppliers to edit their GSTR-3B liability based on the correct factual position, but this clashes with the proposed hard-locking of auto-populated liabilities in GSTR-3B.
If a supplier adjusts liability based on the actual credit note usage, it results in mismatches between ITC reversal by recipients and the supplier’s downward tax adjustments, triggering additional notices.
The proposed amendment to Section 34(2) of the CGST Act, 2017, mandates that ITC reversal by recipients must occur before suppliers can reduce their liability for credit notes. This creates another hurdle, as proving that ITC was never availed in the first place becomes challenging.
In summary, while IMS may reduce ITC mismatch notices for recipients, it could disproportionately increase notices for suppliers, leading to litigation and compliance costs.
Reverse Charge Mechanism (RCM) Invoices- A Missing Link
IMS does not accommodate invoices under the Reverse Charge Mechanism (RCM), which are common in transactions involving specified goods and services. This omission raises critical concerns:
RCM invoices often get auto-populated in GSTR-2B even when recipients are not liable to pay GST under RCM.
Since IMS does not allow rejecting such invoices, erroneous entries remain unresolved, increasing the likelihood of incorrect tax notices.
The existing system does not provide an avenue to dispute auto-populated RCM liabilities, potentially leading to unfair compliance demands on taxpayers.
Conclusion
The introduction of IMS, though well-intentioned, inadvertently increases the compliance burden on taxpayers rather than simplifying reconciliations. While IMS may reduce ITC mismatch notices for recipients, it introduces a new set of challenges, including increased notices for suppliers due to auto-adjustment of tax liabilities.
Moreover, the lack of an option to add missing inward supplies and the exclusion of RCM invoices create critical gaps in the system. To mitigate these challenges, the following recommendations should be considered:
Provide recipients with an option to manually add missing inward supplies.
Allow taxpayers to mark credit notes as “pending” instead of only accepting or rejecting them.
Clarify procedural requirements regarding contract cancellations and credit note issuance.
Develop a mechanism to address erroneous RCM invoices appearing in GSTR-2B.
Ensure that any legal amendments provide clear guidelines on tax liability adjustments to prevent unnecessary disputes.
While IMS is a step toward greater transparency, its success hinges on addressing these compliance hurdles. Without such refinements, the IMS facility risks becoming another bureaucratic burden rather than an enabler of ease of doing business in India’s GST regime.
