Understanding GST ITC Mismatch During Conversion from Composition Dealer to Regular Dealer [Find Draft Reply Here]
This article explains why such mismatches occur, the legal provisions that permit GST ITC claims during conversion, and how taxpayers can respond to departmental queries.
![Understanding GST ITC Mismatch During Conversion from Composition Dealer to Regular Dealer [Find Draft Reply Here]](https://images.taxscan.in/h-upload/2025/08/14/2076648-gst-itc.webp "Understanding GST ITC Mismatch During Conversion from Composition Dealer to Regular Dealer [Find Draft Reply Here]")
Under the Goods and Services Tax (GST) framework, taxpayers registered under the Composition Scheme often find it necessary to migrate to the Regular Scheme, either due to turnover limits being crossed or by voluntary choice. While the transition provides the benefit of claiming Input Tax Credit (ITC), it also sometimes results in an apparent mismatch between GSTR-2A and GSTR-3B....
Under the Goods and Services Tax (GST) framework, taxpayers registered under the Composition Scheme often find it necessary to migrate to the Regular Scheme, either due to turnover limits being crossed or by voluntary choice.
While the transition provides the benefit of claiming Input Tax Credit (ITC), it also sometimes results in an apparent mismatch between GSTR-2A and GSTR-3B. Such mismatches may trigger notices like ASMT-10, DRC-01A, or DRC-01 from the GST department.
1. Why Does ITC Mismatch Happen?
GSTR-2A is an auto-generated statement reflecting inward supplies as reported by suppliers in their GSTR-1. However, when a taxpayer switches from Composition to Regular, the ITC claimed in GSTR-3B may exceed the amount visible in GSTR-2A for that period.
The reason is simple: upon conversion, the dealer is entitled to claim ITC on stock in hand (including inputs, semi-finished goods, finished goods, and eligible capital goods) as on the day immediately preceding the date of becoming a regular taxpayer. This ITC is not necessarily linked to current purchases reflected in GSTR-2A; instead, it relates to goods already held in inventory, purchased earlier when the dealer was not eligible to claim ITC under the Composition Scheme.
The entitlement to claim ITC in such cases is provided underSection 18(1)(c) of the CGST Act, 2017:
> “Where any registered person ceases to pay tax under section 10, he shall be entitled to take credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock, and on capital goods on the day immediately preceding the date from which he becomes liable to pay tax under section 9.”
Further,Rule 40 of the CGST Rules, 2017 prescribes the procedure for claiming such credit, including the requirement to fileFORM GST ITC-01 within 30 days of becoming eligible, declaring the stock details along with applicable tax rates.
2. Filing FORM GST ITC-01 – A Critical Step
To avail the ITC on stock held during conversion, the taxpayer must:
1. FileFORM GST ITC-01 within the prescribed time limit.
2. Provide a complete statement of stock, including item descriptions, value, and applicable GST rates.
3. Retain purchase invoices of such stock to substantiate the claim, wherever available.
Failure to file ITC-01 or maintain proper documentation may lead to denial of the ITC claim during scrutiny.
3. Responding to a GST Notice for ITC Mismatch
When the GST officer issues a notice alleging excess ITC claim in GSTR-3B compared to GSTR-2A, the taxpayer should:
Acknowledge receipt of the notice within the stipulated time.
Explain that the excess ITC pertains to stock credit allowed under Section 18(1)(c) on conversion from Composition to Regular Scheme.
Provide legal reference to the relevant section and rules.
Attach supporting documents, such as:
Copy of filedITC-01 acknowledgment.
Stock statement as on the date of conversion.
Extract from the CGST Act/Rules.
Purchase invoices for goods in stock (if available).
This detailed reply helps the officer understand that the mismatch is legitimate and arises due to a lawful provision, not due to wrongful claim.
4. Best Practices to Avoid Future Disputes
Maintain Proper Stock Records: Keep detailed stock registers with quantities, values, and GST rates at the time of conversion.
File ITC-01 Accurately: Ensure all relevant stock items are reported with correct values and tax rates.
Preserve Purchase Invoices: Even for old stock purchased under the Composition Scheme, keep invoices handy to prove tax payment at the time of purchase.
Regular Reconciliation: Periodically reconcile ITC claimed in GSTR-3B with GSTR-2A and internal purchase records to identify and address potential mismatches in advance.
Conclusion
An ITC mismatch between GSTR-2A and GSTR-3B after converting from a Composition Dealer to a Regular Dealer is not always a sign of incorrect tax practices. The GST law specifically allows credit on stock held during such a conversion, and the difference arises purely from this legitimate provision.
Taxpayers facing notices should respond with a well-documented explanation. Refer to the Draft reply , citing legal provisions and enclosing relevant evidence. By following proper compliance steps and maintaining transparent records, such issues can be resolved efficiently, avoiding unnecessary tax demands and penalties.
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