After businesses claimed an unexpectedly high Rs 65,000 crore as input tax credit (ITC) on the goods held before the goods and services tax (GST) roll-out against their July central GST (CGST) liability, the Central Board of Excise and Customs (CBEC) is verifying these claims with a critical eye. “The possibility of claiming ineligible credit due to mistake or confusion cannot be ruled out… Accordingly, it is desired that the claims of ITC credit of more than Rs 1 crore may be got verified in a time-bound manner,” CBEC member Mahender Singh wrote to chief GST commissioners recently.
The CBEC also directed the field formations to match the credits claimed with closing balance in returns filed under the earlier laws. Moreover, the claims would be checked for eligibility under the GST law and the whole verification process completed by September 20.
Although the government believes these “transitional” ITC claims are abnormally high, tax experts don’t find anything seriously amiss. Given the ambiguity that prevailed on availability of credit on old stocks, large sections of businesses, who typically retained inventories of three to four months, had aggressively cleared the stocks in the two months before the launch of GST. The ITCs tend to be 60-70% of the output tax liability for many businesses like electronic goods and ready-made garments, said a tax expert, requesting anonymity. As per the relevant rules, transitional credits could be claimed both on an actual (input) tax-paid basis with sales as a precondition and as deemed credit.
The transitional claims, however, doesn’t mean the government’s GST revenue for July is lower than announced earlier (at last count, the collections were in excess of Rs 95,000 crore, net of the ITC)
Apart from the Rs 65,000 crore transitional credit claimed against CGST, such claims may have been made against state GST (SGST) as well. However, the exact quantum of claims against SGST is not immediately estimated.
Moreover, tax experts say many firms were yet to file TRANS-1 forms, which is mandatory for claiming transitional credit on pre-GST stocks. With the extension of deadline for TRANS-1 by a month to October 31, the claims are set to be higher.
According to official statistics, the government has garnered over Rs 95,000 crore as July GST, net of ITC. Nearly 70% of eligible 60 lakh taxpayers have filed returns for the first month of GST. The CGST revenue was nearly Rs 15,000 crore, SGST Rs 23,000 crore while integrated GST collections stood at Rs 47,000 crore. Over Rs 7,000 crore has been collected from assorted cesses, designed to compensate the states.
In his missive to chief commissioners, Singh added that the “credit specifically excluded under section 17 (5) of the CGST Act is not eligible to be carried forward”. Under the section, ITC is not available for motor vehicles and other conveyance, food and beverage, outdoor catering, membership of a club and travel benefits, among others, unless these are used as input for further supply. Similarly, the law prohibits claiming ITC for works contract not used for further supplies, goods used for personal consumption and goods stolen or lost.
“The verification of input tax credit claims exceeding Rs 1 crore would be a very tedious exercise and it is hoped that sufficient time is provided to the taxpayers to provide the information required for such verification.
It would be advisable to formulate a uniform and transparent process for this exercise so that taxpayers are not subjected to any difficulty,” said MS Mani, tax partner at Deloitte.
“Businesses should start working on the verification process by preparing the relevant details as timelines seems draconian. Its expected that officers will limit themselves to matching the credit claimed with closing balance in returns filed under pre-GST regime and checking the eligibility of credit under GST regime,” Rajat Mohan, partner at AMRG Associates, opined.