This is largely because state authorities are new to dealing with service providers.
Twenty months since the launch of the goods and services tax (GST), tax officials under state governments are still struggling to handle the large assessees that have come into their fold, especially the service providers and small manufacturers. This has resulted in the twin issues of high revenue leakage and denial of input tax refunds to eligible taxpayers, mostly service exporters, several industry sources and analysts tracking the GST system told FE, recounting anecdotes.
A committee of state finance ministers is learnt to have been set up under Bihar deputy chief minister Sushil Modi to look into the issue of GST (service tax) revenue leakage under state tax authorities.
In the pre-GST regime, tax departments with the state governments used to handle sales tax and later Value Added Tax (VAT), apart from the taxes on real estate transactions and alcohol. Under an arrangement approved by the GST Council, however, apart from 90% of taxpayers below the `1.5 crore turnover threshold, half of the firms with turnover above `1.5 crore also came under the states, a large segment of which being service providers.
So, legitimate ITC refunds are being denied by the state administrators as many field officials have little experience earlier of repaying funds to the assessees.
As at the end of December 2018, while the Central tax authority was yet to disburse ITC refunds of Rs 902 crore, the corresponding amount for state tax administration was Rs 2,678 crore. When unsettled refund claimed used to be much higher earlier, the funds were mostly withheld by state officials. While ITC is mostly used by taxpayers to settle output tax liabilities along with cash payments, sections of them also claim ITC refunds; apart from exporters those who seek refunds include assesses in industries suffering from inverted duty structure like textiles.
In many other cases, however, the service providers are deliberately availing of inadmissible ITC refunds running into several hundred crores, sources said. “For instance, a service provider is not allowed ITC on building material (cement and steel) for constructing own office complex but many assessees under state administration are still claiming it.” Rajat Mohan, partner, AMRG & Associates said. He added that since monthly GSTR-3B return only requires summary of credit claimed, it is easier to hide such ineligible credit components under the lumpsum amount without being red-flagged by the IT system.
Additionally, in some cities, the state tax administration handling service providers have resorted to unofficially roping in chartered accountant firms to help them navigate GST provisions dealing with taxes on services, sources familiar with such practices told FE.
Saloni Roy, senior director at Deloitte India said :“Challenges have begun emanating for service exporters in processing GST refunds from the state GST authorities. This is largely because state authorities are new to dealing with service providers. There are serious teething problems that are being faced by service providers in obtaining refunds/rebates.”
On the flip side, service providers engaged in exports and under state tax administration are also suffering because their ITC refunds – the process which requires manual intervention as opposed to IGST refunds which is completely online – are being inordinately delayed by officials not confident of approving claims. Ajay Sahai, Director General and CEO at Federation of Indian Export Organisations (FIEO) said: “Nearly 40% of ITC refund applications aren’t being admitted by officials as acceptance brings an obligation to clear 90% of refunds within a week, failing which an interest is to be paid on the amount as per GST Act.”