Tax relief for recovery: GST concessions can go a long way in supporting businesses

Updated: Apr 24, 2020 4:03 PM

The post-Covid economic scenario will be extremely cost-sensitive. Seamless flow of ITC can greatly reduce cost stress.  During lockdown, companies will still incur routine expenses (such as rent, IT) without revenue.

Routine business activity post-recovery may encounter several hurdles under GST.

By Praveen William and Sandip Jain

The coronavirus pandemic has shaken the world as well as Indian business, with a complete shutdown bringing routine business operations to a grinding halt. Various measures have been taken to tide over the storm hitting the Indian economy. With respect to GST, the Government has announced relief by way of relaxations in various compliances. While this is a welcome initiative, substantive and targeted relief will re-assure consumers and business alike, in this difficult time.

  • Consumer relief

Essential commodities

Price controls have been imposed on various essential commodities. Recently, the Government has also announced exemption to customs duties and health cess on such products. It is desirable that GST rates are exempted/reduced on critical items including:

Basic costs (such as logistics, manpower) in manufacturing essential items have increased during lockdown due to shortages. To scale up production and ensure supply – the Government may even consider reimbursing a portion of these costs to manufacturers.

Healthcare services

Hospital services are exempt from output GST. However, hospitals routinely incur several input taxes including:

  • Huge GST outlay on capital procurement of equipment.
  • Recurring GST on medical devices/items/drugs and services such as rent/marketing/R&D.

As ITC facility is not available for exempt supply, these credit costs are built into price of hospital services. To alleviate this, hospital services can be ‘zero rated’ allowing refund of such ITC. This would reduce cost of service and deliver benefits to patients in a time of massive demand.

Similarly, private healthcare premiums are currently taxed at the 18% rate. Through exemption/reduction of GST, private insurance can also be made affordable to policy holders.

Strong anti-profiteering mechanisms with sensitization of end customers can ensure passing on benefits on rate reduction.

  • Business relief

Illustrative Industry issues

Routine business activity post-recovery may encounter several hurdles under GST including:

i) Disruptions will lead to non-performance of contracts. Parties may commercially settle liability contractually through liquidated damages or arbitration. The Department has typically demanded GST on settlement amounts as ‘acts of toleration’. This would delay resolution of disputes.

ii) Companies have actively assisted in relief efforts in response to the Government’s call to action. Manufacturers of essential items such as masks and FMCG retailers have distributed a portion of their inventory as relief. ITC on such items may not be available as a blocked credit, an unintended negative consequence of such charitable acts.

iii) The auto sector will be key to any post-crisis recovery. Auto entities scrapping existing inventory under newly introduced BS-VI standards may also need to reverse ITC, a double blow to this critical sector for a bonafide policy change.

iv) A rebound of exports is also essential. Exporters hitherto had the option of filing applications under the Service Export India Scheme (SEIS) for FY 2016-17 until 31st March 2020. There is ambiguity if this date has also been extended till 31st December 2020, similar to other FYs. Currently, there is already a significant backlog of SEIS applications. Delay in disposal and lapse will further hurt service exporters.

Pro-active redressal of industry grievances will go a long way in assuring business of continued support in post-crisis recovery.

Operational issues

The post COVID economic scenario will be extremely cost sensitive. Optimum flow of ITC can greatly reduce cost stress to business at this stage. The immediate scenarios arising below therefore demand attention:

  • During lockdown, companies will still incur routine expenses (such as rent, IT) without revenue. As business picks-up, offset of ITC against output will be staggered. Stressed sectors such as travel and tourism may prefer an immediate inflow of cash of ITC, rather than prolonged adjustment.
  • Crunch in cash flow can hinder credit validity. Payments not made to suppliers within the statutory 180 days period or with-holding of payment for non-performance can lead to credit loss.
  • Vendors may default in filing returns or discharging tax payment even over an extended period due to genuine business difficulties. This will make reconciliation of ITC a difficult task. It would be ideal if the statutory date for credit claim itself be deferred considering this.

Minor procedures increase physical compliance in a time of limited mobility. Certain temporary measures are desirable to ensure lockdown is implemented in right earnest:

  • Filing all applications with Aadhar-linked Electronic Verification Code (OTP) rather than Digital Signature
  • Exemption from uploading invoices for GST refund, which requires manpower on site
  • Consideration of scanned copies of invoices as actual invoice copies require physical signature.

Conclusion

In taxing times, the GST has the potential to prove its worth as a consumer and business friendly tax. Slowdown in business may reduce revenue collections post-recovery. A collaborative approach from business and Government, on the lines suggested, is the need of the hour to restore normalcy after a prolonged shock. Let us all move together to ‘un-tax’ the coronavirus.

Praveen William is Partner, Indirect Tax, KPMG. Sandip Jain is Chartered Accountant. Views are personal

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