GST: Cap On Input Tax Credit Without Invoice May Cause Working Capital Issues, Say Experts

The government’s move to restrict input tax credit may cause working capital issues and increase compliance burden for businesses, experts said.

To plug revenue leakage, the government had last month amended rules by limiting input tax credit to 20 percent of the eligible amount for invoices where details aren’t uploaded by the taxpayer’s supplier. Taxpayers, at present, can avail input tax credit for invoices that haven’t been uploaded by the suppliers in their GSTR-1 or sales returns.

For instance, if taxpayer A has input tax credit worth Rs 10 lakh for the ongoing month, and his supplier has only uploaded invoices worth Rs 6 lakh for sales made to him. Under the new rules, the taxpayer would be able to adjust credit against his/her GST liability of Rs 6 lakh and Rs 1.2 lakh (20 percent of Rs 6 lakh). Taxpayer A can avail the remaining credit in subsequent months after his supplier uploads the invoices.

That, according to Krishan Arora, partner at Grant Thornton India LLP, would add to compliance burden for taxpayers, leading to additional working capital issues as taxpayers wouldn’t be able to utilise entire credit pool, at once, for the purchases made in a month.

Under the new mechanism, input credit in GST returns would be manually matched against the government’s idea of automatic matching of credit from returns filed through GST portal, Arora told BloombergQuint. There’s a possibility the government is limiting the use of input credit pool till introduction of automatic matching and to avoid revenue loss, he said.

GST collections fell to the lowest in 19 months in August amid slowing consumption in the economy to Rs 95,380 crore. Collections in September stood at Rs 95,380 crore—a year-on-year decline of 5 percent and 3 percent lower than the monthly average of Rs 98,114 crore for FY19.

According to Abhishek Jain, partner at EY India, given that only unmatched credit up to 20 percent of those uploaded by vendors is allowed, businesses need to ensure well-designed systems or processes are put in place to ensure reconciliation of credits to avoid loss of credit and better management of working capital.

How It Will Work

Taxpayers avail credit in summary GSTR-3B, and revise their credit liability for the financial year in the returns for September. Taxpayers have to file details of the sales made in GSTR-1, by the 11th day of the following month. Once GSTR-1 has been filed by a taxpayer, GSTR 2A—purchase tax return—is automatically generated for each business on the GST portal. Data on GSTR-2A would be used to match eligible input credit for taxpayers.