ITC on Autopilot? The Hidden Risks of Real-Time GST Reconciliation

 Let’s start with a small story in this regard...

Client B runs a mid-sized manufacturing unit. Every month, his finance team proudly informs CA X that their Input Tax Credit (ITC) reconciliation is “fully automated.” They use a cloud-based tool that pulls GSTR-2B data, matches invoices, and generates exception reports.

One morning, however, Client B receives a GST notice. The department points out ITC claimed on invoices where the supplier has not paid tax to the government. The software showed “Matched.” The books were clean. But the liability? ₹18 lakh plus interest.

Client B looks at CA X and says, “But everything was automated. How did this happen?”

That question is becoming common in FY 2025–26.

Automation has improved GST compliance but it has also created a dangerous illusion: that matching equals eligibility.

Let’s break this down.

 

 The Myth of “Auto-Match = Safe ITC”

With the evolution of GSTR-2A and now GSTR-2B, reconciliation tools have become sophisticated. Most software compares purchase register data with portal data and flags mismatches in real time.

But here’s the problem.

GSTR-2B confirms that the supplier uploaded the invoice. It does not confirm:

·       Whether the supplier filed GSTR-3B

·       Whether tax was actually paid

·       Whether the supplier is operational or compliant

·       Whether the invoice is part of a circular trading chain

Section 16(2) of the CGST Act clearly links ITC eligibility to tax payment by the supplier. Yet, most businesses rely solely on matching status.

Automation checks visibility. The law checks compliance.

That gap is where risk lives.

 

The Vendor Default Domino Effect

In many cases, Client B may have paid full invoice value including GST to the vendor. However, if that vendor defaults in filing or tax payment, ITC becomes vulnerable.

Under increasing GST enforcement, officers are issuing notices based on:

·       Supplier non-filing patterns

·       Suspicious ITC utilization ratios

·       E-invoice analytics

·       Risk ratings assigned internally

Even where the recipient is genuine, ITC can be questioned if supplier compliance history is poor.

 

Real-time reconciliation tools rarely evaluate:

·       Vendor GST filing consistency over 6–12 months

·       Sudden drop in tax payments

·       Frequent amendments or cancellations

·       GSTIN suspension history

In other words, tools reconcile data. They don’t assess behavioural risk.

And GST is now data-driven enforcement.

 

The Over-Reliance on Exception Reports

Automation generates “matched,” “mismatched,” and “missing” reports. Finance teams often focus only on “missing invoices” and follow up with vendors.

But three subtle risks get ignored:

1.     First, invoices may appear in 2B but belong to a wrong period. Claim timing errors trigger interest.

2.     Second, duplicate ITC claims can happen if credit notes are not correctly mapped.

3.     Third, amended invoices might pass through unnoticed if earlier mismatches were not reversed.

Many businesses treat reconciliation as a compliance ritual instead of a control system.

The danger increases when ITC is claimed aggressively every month without layered verification.

Automation reduces manual work but it also reduces human questioning.

 

Real-Time Enforcement Is Not a Myth Anymore

GST administration has evolved rapidly. With e-invoicing and integrated return data, the department can detect anomalies much faster.

Analytics now identify:

·       High ITC-to-output ratios

·       Sudden credit spikes

·       Vendor clusters with similar filing patterns

·       Circular trading indicators

What once triggered annual scrutiny now generates near real-time alerts.

In several cases, notices are issued within weeks of irregular claims not years.

Businesses that rely only on portal matching are discovering that compliance depth matters more than compliance speed.

The question is no longer “Did it match?”

The question is “Is it defensible?”

CA’s Lens: From Reconciliation to Risk Governance

For Chartered Accountants, this is a strategic shift.

ITC reconciliation should not be treated as a back-office accounting activity. It must become a structured risk management process.

CA X’s role is evolving from:

·       “Download and match”

                        to

·       “Validate, risk-rate, document, and defend.”

Forward-thinking firms are now:

·       Classifying vendors by compliance reliability

·       Creating monthly ITC risk dashboards

·       Maintaining supplier communication records

·       Advising clients to hold payment for habitual defaulters

·       Building documentation files for potential notices

Automation is a tool. Governance is a professional responsibility.

The CA who builds a layered ITC control framework will add far more value than one who simply reconciles numbers.

 

Action Checklist for Clients & CA Firms

1.     Conduct quarterly vendor compliance reviews (filing history + status).

2.     Avoid claiming ITC immediately for newly onboarded vendors without due diligence.

3.     Document follow-ups for missing invoices and retain email trails.

4.     Create a policy for high-risk suppliers (advance holdback, alternative sourcing).

5.     Perform period-end ITC ageing analysis before finalization of returns.

6.     Reconcile credit notes and amendments separately.

7.     Maintain a litigation-ready ITC defence file for large credits.

 

 A Simple Risk Framework

Here’s a simplified layered model CAs can adopt:

·       Layer 1: Portal Matching (2B vs Books)

·       Layer 2: Vendor Compliance Check (Filing + Payment Behaviour)

·       Layer 3: ITC Ratio & Trend Analysis

·       Layer 4: Documentation & Defence File

Automation handles Layer 1.

Professional judgement governs Layers 2 to 4.

 

Closing Insight: Autopilot Needs a Pilot

Technology has undoubtedly improved GST compliance efficiency. Real-time reconciliation saves time, reduces manual errors, and improves transparency.

But autopilot systems in aircraft still require trained pilots.

In GST compliance, software can match invoices but it cannot assess intent, credibility, or risk appetite.

Client B eventually understood that automation did not fail him. Over-reliance did.

For FY 2025–26, the advisory opportunity for CAs lies not in selling tools but in designing controls.

Because in GST, what is claimed automatically may still be questioned manually.

And when notices arrive, defence depends not on software reports but on structured documentation and prudent professional oversight