Matching of Input Tax Credit and Auto-reversal :
Matching of ITC and auto-reversal is one of the core features of GST. The primary reason for having this feature arises from the fact that one of the most important design specification of GST is that it should allow full credit of taxes paid across State boundaries, making it a truly national tax while keeping the federal structure intact. Operationally, it allows a taxpayer registered in one State can take credit of IGST paid to a taxpayer registered in another State against SGST payable by him in his State and vice versa. This requires that whenever a taxpayer takes credit of IGST paid against SGST payable, the Centre transfers an equivalent amount to the relevant State and whenever a taxpayer takes credit of SGST paid against IGST payable, the relevant State transfers an equivalent amount to the relevant Centre.
For smooth operation of such a fund transfer mechanism, which is essential for smooth flow of credit, it is important that a system is in place which ensures that whenever a taxpayer takes credit of any tax paid on his inputs, the tax amount has either already been collected or gets collected in due course. It is also essential that such a system runs without any manual intervention. Matching of input tax credit and autoreversal provides exactly that mechanism.