The Central Board of Indirect Taxes and Customs (CBIC) is likely to introduce a mechanism to track reverse charge liability of businesses under the Goods and Services Tax (GST) framework to improve compliance, and ensure that excess input tax credit (ITC) is not availed by them, official sources said.
According to the sources, the CBIC and the Goods and Services Tax Network (GSTN) are working on creating an “Input Tax Credit (ITC) ledger” to track the quantum of ITC availed by businesses accurately. The ledger is expected to be operational by the GSTN in October or November.
Under the GST framework, certain businesses are required to pay tax through the reverse charge mechanism (RCM), meaning the recipient of goods or services is responsible for paying the tax instead of the supplier. This approach helps extend GST coverage to various unorganised sectors (which act as suppliers) and ensures the taxation of imported services when suppliers are located outside India.
After paying the tax and issuing an invoice, the recipient is eligible to claim input tax credit (ITC). However, there have been instances where ITC has been claimed without the recipient actually paying the GST under RCM, or where disproportionately higher ITC has been claimed. The CBIC aims to address these issues by ensuring that the ledger correctly reflects RCM-related data.
From compliance perspective, this could simplify audits and assessments related to RCM, while also potentially minimising disputes related to erroneous ITC claims, said Ankur Gupta, practice leader-indirect tax, SW India.
According to the finance ministry, fake input tax credit (ITC) detection surged 50% year-on-year in FY24 to Rs 36,374 crore, as against Rs 24,000 crore in FY23. In FY24, not even 10% of the detected amount was deposited voluntarily, Minister of State for Finance Pankaj Chaudhary had informed Parliament in July.
Tax experts say that operationalisation of the new mechanism will require close coordination between businesses and the GSTN. “Taxpayers will need to ensure that their ERP systems are adequately configured to capture and reconcile RCM data in real-time with the GSTN’s ledger,” said Gupta.
Pratik Jain, partner, PwC India said that the ledger system will enable the government to track and limit the ITC to the extent of payment made under RCM and minimise the tax leakages. “It can also perhaps identify high risk taxpayers who are then subjected to greater scrutiny,” he added.