GST Input Tax Credit: Honest Taxpayers May Be Spared Brunt Of New Rule

New sets of amendments and additions have recently been introduced in existing Goods and Services Tax provisions via the Fourteenth GST Amendment Rules, 2020. This article focuses on one such crucial rule inserted relating to input tax credit with effect from Jan. 1, 2021.

A new rule 86B has been inserted, requiring a certain unique segment of taxpayers to compulsorily discharge at least 1% of their output GST liability in cash.

Typically, the fraudsters tend to illicitly discharge the entire GST liability through ITC available, thus avoiding cash payments. With this restriction, it appears that yet another check to trace fraudulent taxpayers has been introduced by lawmakers considering the increase in daily fake invoicing spams. In a way, this shall ensure curbing mala fide acts and plug revenue leakages in the government’s treasury.

While this compulsory requirement of discharging GST liability of at least 1% through cash appears to be harsh during this time of the pandemic, minute analysis of these provisions gives a different perspective altogether in the form of exclusions outlined below from these strident compliances.

1. The taxpayers with the value of taxable supply (other than exempt and zero-rated) less than Rs 50 lakhs in a month. Thus smaller taxpayers would be excluded from this compliance.
2. The taxpayers or principal officers of the taxpayers such as managing director, whole-time director, any two partners, etc. have paid Rs 1 lakh as income tax under the Income Tax Act, 1961, in each of the last two financial years.
3. The taxpayer has received a refund of unutilised ITC exceeding Rs 1 lakh in the preceding financial year on account of either zero-rated outward supplies made without payment of tax or inverted duty structure.
4. The taxpayer has discharged GST liability by way of cash exceeding 1% of the output tax liability, applied cumulatively, up to the relevant tax period in the current financial year.
5. The taxpayer is a government department, a public sector undertaking, a local authority, or a statutory body.
6. Removal of restriction at the discretion of commissioner or officer authorised after necessary verifications and safeguards.

What is unique and interesting is the exclusion criteria discussed in the second point. The limitation here is given to the taxpayer or his principal officers in a case where either taxpayer or its principal officer has discharged income tax of more than Rs 1 lakh in each of the last two years. This exclusion criterion seems to be extremely significant for the following reasons:

• Most of the large corporates would get excluded from this compliance as, more likely than not, these taxpayers or their principal officers would be covered under Rs 1 lakh income tax criteria. For instance, even if a corporate is making losses but if it has a turnover of Rs 6 crore annually, it is likely that it would be paying remuneration more than Rs 9 lakh per annum to the said top management personnel such as managing director, whole-time directors, partners, etc. Thus, these top personnel would simply get covered under Rs 1 lakh income tax criteria, excluding the corporates or firm, i.e., taxpayer from the net of the present new rule. It appears to be an out of box thinking on the part of lawmakers to exclude the genuine bunch from the heat of this compliance even if the said corporates/ taxpayers are making losses.
• Further, lately, we have heard about a collaboration between the department of Income Tax and GST. The flavor of the same can be seen in this provision where the basis of the income tax payment of the taxpayer or its principal officers, relief is granted under GST. Probably, it is the shared data analytics between CBIC and CBDT to cull out the segment of potential fraudsters.

While the intention of the present rule is to single out unlawful taxpayers, a certain bunch of genuine taxpayers may face a cash crunch. ITC may be blocked in cases where there is an accumulation of stock due to the pandemic, for startups not having income tax records, for newly registered exporters who are yet to file their refund claims. However, for such cases, the authorities have provided a window by granting power to the commissioner to remove such restrictions after necessary verifications and safeguards. Hopefully, the commissioners would adopt a pragmatic approach and provide relief to genuine taxpayers facing the brunt of these provisions.

Be as it may, it is good to see lawmakers being sensitive about the stringent measures and applying novel filters by granting relief in cases where income tax is paid by the taxpayer or principal officers.

Administrators have conceptualised a novel way to deal with fraudulent mindset with linkage to income tax provisions. With the insertion of numerous exceptions, care seems to have been taken while drafting this new rule to ensure that no turbulence is created both for small as well as large taxpayers. At the same time, efforts are made to identify a segment more prone to such scrupulous activities.

Saket Patawari is Executive Director – Indirect Tax, and Khushbu Trivedi is Manager, at Nexdigm (SKP).

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.