GST reconciliation

Transforming Accounting: From Data Gathering to Enhancing Cash Flow

Traditionally, the role of accounting has always been the data keeper. The Accounts team has always been regarded as both a booster of cash flow and a cost center for businesses, merely maintaining records of Company activities. However, recent developments have assigned additional roles to account teams, altering this perception from mere data recording to actively boosting cash flow. The 21st Century has realized the importance of data and its analysis. Data analysis is not just limited to operation activities. It has also made its presence felt in account function as well. One such data digging exercise we will be focusing on today is boosting cash flow through Ledger reconciliation.

The Impact of Ledger Reconciliation on Cash Flow

Based on the clients that we have served we have observed the following results from the ledger reconciliation activities:

Rs 998 cr Vendor unadjusted advances identified.
Rs 3,761 cr Debit note raised by Company but not booked by vendor and customers.
Rs 2,942 cr invoice was reversed by the vendor even though GST credit was claimed by the Company.
Rs 314 cr Credit note issued by vendor but not accounted by Company.
Rs 53 cr TDS deducted by customers but not recorded by Company.

All the above can have a direct and/or indirect impact on the cash flow of the Company. If the account team is able to identify such a mismatch on a timely basis and deep dives into it then it can convert itself from a cost center to a profit center.

The Power of Automated Reconciliation

Manual reconciliations, even with Excel – MATCH, HIGHLIGHT, or LOOKUP formulas, bear the risk of human errors. Any inefficiency or deficiency in reconciliation plagues the entire enterprise; it affects the credibility of financials, causes inefficient decision-making, and affects the goodwill of a company. Automated reconciliation is the solution to all the above issues.

Automation can simplify and streamline the tedious reconciliations process. With minimal human involvement, the entire process of vendor communication, follow-ups, tracking, gathering, and summarizing voluminous information works automatically in the background. The added leverage of real-time analytics makes companies proactive and efficient.

The Role of Technology in Accounting

Above shared observations are the result of use of technology for reconciliation. Therefore, the CFOs and Account teams shall keep adopting the technologies which can help them in analyzing and interpreting the huge data that rests with them.

One such cloud-based automation software is Firmway, started by a team of Chartered Accountants to simplify time-consuming reconciliations. Using the latest technology such as AI, it performs reconciliations at par with industry standards and practices.

Technology makes reconciliations, be it vendor, bank, GST, or TDS, simple and efficient. Furthermore, it simplifies the communication of reconciliation differences through a world-class online action tracker. Therefore, prioritizing the adoption of technology in accounting and reconciliations is crucial for CFOs and Account teams, ultimately leading to a boost in cash flow.

Background

In recent years, fraudulent practices have been prevalent in availing Input Tax Credit (ITC). In FY2021, more than Rs 35,000 crores of ITC was wrongly claimed. This misuse primarily stemmed from Rule 36 of the CGST Rules, 2017. This underscores the critical importance of GSTR-2B reconciliation.

Rule 36 amendment and its impact

The amendment introduces GSTR-2B as a benchmark for determining the amount of eligible ITC. From January 2022, businesses can avail of ITC only to the extent reflected in GSTR-2B. Earlier, Rule 36 allowed buyers to avail of provisional ITC (over and above the amount prevailing in GSTR-2B) up to 5% of the eligible ITC reflected in GSTR-2B, but not anymore. Restricting ITC to GSTR-2B impacts businesses negatively, especially large-scale companies with crores of ITC in the funnel. Thus, it has become increasingly vital to reconcile GSTR-2B and the purchase register.

Imagine losing crores of ITC due to inefficient reconciliation of GSTR-2B and purchase register. It will impact working capital and may even lead to a financial crisis. According to Ernst & Young – industry trends depict mismanagement of ITC may increase working capital requirements by 5-7% and negatively impact profit before tax by 1-2%.

The following illustrations explain how inefficient reconciliation of GSTR-2B and purchase register may lead to loss of ITC:

Say out of Rs 1,00,000/- of total purchases, the supplier furnishes details of Rs 70,000/- in GSTR-1. Therefore, GSTR-2B will depict eligible ITC as Rs 70,000/-, and ITC worth Rs 30,000/- will be lost until the supplier updates it.
A failure to update purchase-related credit notes in GSTR-2B can also result in over claiming of ITC, which is subject to penalties. CGST law prohibits ITC claims for credit notes even if not yet updated in GSTR-2B.

Thus, the onus of reconciling GSTR-2B and the purchase register to reduce the risk of ITC disallowance and penalties is more prevalent than ever.

Why automate GSTR-2B reconciliation?

Reconciliation of innumerable transactions of GSTR-2B and purchase register is a tedious task, especially when done manually. Reconciliation is possible with Excel formulas like LOOKUP, MATCH, etc., but to some extent only. There is always a risk of corrupting Excel files with heavy GSTR reports and purchase registers. Moreover, manual intervention in applying formulas also exposes you to errors, thus marking the need for automation in reconciliation.
According to Deloitte’s — GST@5 survey 2022, reconciling ITC with auto-generated reports (GSTR-2B) is the highest-ranked issue with GST and automation is an ideal solution. Adopting technology and automation for GST is prevailing in all — large, medium, or small-scale enterprises as they are losing crores of funds in ITC mismanagement.

One such software that can help you save crores is Firmway. It is a SaaS-based software company specializing in multi-GSTIN and multi-month reconciliation of GSTR-2B and purchase registers. This innovative platform automatically carries unmatched items from the previous month and matches them with the data from the following months. Achieving up to 95% accuracy, it relies on a unique blend of technology and algorithm. Not only reconciliation but technology also smoothens the further steps: vendor communication and summarizing reports. Thus, opt for technology to simplify the voluminous task of ITC reconciliations and save yourself from litigation.

Tag: GST reconciliation