Come January 1, businesses could find their working capital and profitability taking a hit if any of their suppliers fail to upload their invoices on the goods and services tax (GST) portal, as the government has tightened the norms on input tax credits (ITC) to check frauds. By doing away with the provisional ITC, the authorities have also made it difficult for small businesses to get supply orders from Corporate India, which will now deal with only businesses above a certain size that can meet the compliance requirements under the GST regime. Currently, businesses can claim 5% of their total eligible ITC as ‘provisional’ ITC even if these are not matched with supplier invoices. As per the rules for Central GST notified by the Central Board of Indirect Taxes and Customs (CBIC) on Tuesday, no provisional ITC would be available to businesses from January 1. The 5% provisional ITC has been giving a cushion to businesses, more so to MSMEs, which are struggling to come out of the pandemic-induced slump, analysts reckon.
“It’s a bit unfair that even after complying with all GST return filings and tax payments, a business has to suffer due to non-compliance by some vendors. Effectively, tax administration shifts the compliance burden to recipient of goods/services,” said MS Mani, Partner, Deloitte India.
After GST was rolled out from July 2017, all taxpayers claimed ITC on a self-declaration basis. From October 2019, the concept of provisional ITC was introduced, allowing businesses to claim only 20% ITC as provisional (largely covering non-compliant vendors) from the eligible ITC reflected in their GSTR-2A statement on the inward supplies. The provisional ITC got reduced to 10% in 2020. However, from January 1, 2021, this limit was reduced further to 5% of the eligible ITC reflected in the GSTR-2B.GSTR-2B is an auto-populated (from GSTR-1, GSTR-5, GSTR-6 and ICEGATE) statement reflecting input tax credit details.
The central tax authorities have booked about 8,000 cases involving fake ITC availment of over Rs 35,000 crore in FY21. While misuse of the beneficial provision of ITC under GST regime was the most common way of evasion under the GST law, the scale of this has been worrisome for the taxman.
However, Mani said, given that nowhere in the world vendors are 100% compliant with regard to GST as small businesses lack resources to engage professional tax consultants or hire the skilled manpower, 5% provisional ITC gave a cushion to businesses and it should have been continued for a few more years till GST stabilised.
For a company which pays `100 crore GST in cash every month, 5% amounts to Rs 5 crore and that is huge sum from working capital point of view. “This will lead to a situation where large businesses will deal with large businesses only as dealing with smaller one means losing some credits,” Mani added.