Input Credit & Output Liability of GST in India: GSTR1/2/3/2A/3B

Businesses in India have to charge customers a certain amount of tax on services and products as Goods and Services Tax (GST) depending on the category that they’re selling to their B2C and B2B customers. If it is food, it is 5%, and if it is furniture, it is 18%, etc. Here is a detailed category wise GST list.

Suppose you’re a business selling home-made pickles. You started selling one pickle of 200 gms at a standard price of Rs.100 initially in your neighborhood, and slowly you expanded and your business also expanded. Once your turnover moves beyond the GST limit, you’ll now have to charge tax on this sale, a GST of 18%. So, your end customer’s price will become 118 instead of 100. When businesses are selling they charge a certain percentage of tax, and the government will collect that money. Now, the mango pickle business owner says – hold on! this seems a bit unfair, because I am increasing prices to my customers, taking a hit on my market share, and collecting taxes and giving it to the government, and on top of it I am also paying taxes on my raw-material when I am buying raw-material such as mangoes, chilli-powder, sesame seeds, etc. in terms of GST in the department store. So, I am paying double tax. No, that is not the case. All purchases done for your business can carry the GST number, and the corresponding 18% or applicable GST will be added in your GST number as your GST credits. This is also called as input credit. Let’s assume for simplicity, you sold 10 pickle jars of Rs.118 in a month, and in that month you purchased Rs.50 of all purchases for business (and your taxed bill for purchases is Rs.59), then your output liability is Rs.18 (on your customer invoice of Rs.118) and your input credit is Rs.9 (on your purchases of Rs.59) and your net tax liability to be paid is Rs.9. This input credit will reflect in your credit against your GST number basis your suppliers outward B2B invoices, and when you’re paying the tax you need to pay only 18 minus 9, a total of Rs.9 as your GST.

So, you first have an output liability (basis your outgoing bills/receivables) and then you have the input credit (basis your incoming bills/payables) and the net of it is your actual liability in terms of tax to the government. Each of these are given a certain name: Output Liability is called GSTR1, Input Credit is called GSTR2 and Net Liability is called GSTR3

Output Liability (GSTR1) – Input Credits (GSTR2) = Net Liability (GSTR3)

So, when the same business is spending money on buying raw-materials, bills for its technology services, etc. then it can use the same GST number and it will get a certain input credit in its account. So, the output of the raw-material vendor (GSTR1) will have to match with your input (GSTR2). This means, if you are claiming a credit that you have bought mangoes from Ram Leela Mangoes then Ram Leela Mangoes also has to file and output GSTR1 that they have sold to you. This means all purchases and sales are matched real-time under GST and that is why it is a very tight and compact system.

Earlier to GST, in India, to collect that same 18% the government had to go to different people in the supply-chain and collect their own (liability minus input) and the matching of records was offline and it used to be a nightmare. 1st July 2017 was celebrated as the day of GST in India, and I clearly remember the amount of change we had to do for all SKUs and all previous systems in Amazon when I was working at that time. But, all that effort is clearly for the best and good. GST is clearly a much better collection system for the government and it is a clean record-matching system.

But sometimes this is a big headache especially if you’re the end seller in the supply-chain who is selling to the end customer. In my past experience, we had experiences where some of our suppliers or vendors have not filed their output GST correctly or intentionally missed filing our invoices or won’t pay the net liability amount. In this case, you’ll not get the input credit or sometimes your input credit will be reduced in retrospective if your suppliers don’t pay their liability. So, when you call your supplier on why are you not filing or paying, then the supplier will say I don’t have the money for this right now and I will pay later or file later (next quarter) and my money has to be utilized now for other priorities. Do you see the problem? You will be charged the entire 18% and no input credit, and your chartered accountant will come running to you to solve the problem with your suppliers immediately. So, your supply-chain’s problem or your supplier’s problem is now your problem!

Now that you got the essence of GST and its basics of output liability and input credit (GSTR1 and GSTR2), let’s dive deep a little bit more into the other complexities.

It is just yet not that simple: GSTR1, GSTR2 and GSTR3. It is a bit more than that but the core message remains the above. But, for record matching reasons, there are slight derivatives of each of GSTR1, GSTR2 and GSTR3 used in records and filings. We call those additional derivatives as GSTR2A and GSTR3B.

GSTR-2A: Statement showing all the inward supplies received during the month. This statement is auto generated from GSTR-1 filed by respective suppliers.

GSTR 2A is auto populated by the system which will take in to consideration of invoices uploaded by your supplier. You have to just check the details of 2A and ensure all are correct. Then go to GSTR2 and click prepare GSTR2 summary and the system will bring all 2A invoices to GSTR2, and after checking for its correctness you can file GSTR2.

GSTR-3B: Return showing the outward tax liability and ITC available. This tax liability is calculated from the data derived from GSTR-1 & GSTR-2A.

So every month, business have to do a ton of filing in India in the GST regime for the good. As we saw, there are three types of returns to be filed by the “Normal taxpayer” every month along with one annual return, which consists of

1.GSTR-1 for outward supplies/sales (with detailed info)

2.GSTR-2 for inward supplies/purchases

3. GSTR-3 for detailed summary of both the returns stated above.

And each of these filings have to be exactly matching with each other and different periodic levels (monthly, quarterly, and annually) and also with your sellers and purchasers records at different periodic levels (monthly, quarterly, and annually)

Further to ease the compliance in the initial stages of the GST regime, one new return was introduced as a GSTR-3B for brief summary of both purchase and sale of a month (without detail of individual invoices). As difficulties are faced by many taxpayers to file such detailed returns, GSTR-3B is still in continuance by CBEC.

Hope this is useful, thank you.