GST Amendment Limits Input Tax Credit Utilisation To 10% On Missing Invoices
An employee displays a receipt book showing a store’s goods and services tax identification number (GSTIN) in an arranged photograph in New Delhi, India. (Photographer: Anindito Mukherjee/Bloomberg)

GST Amendment Limits Input Tax Credit Utilisation To 10% On Missing Invoices

Businesses can now avail input tax credit on missing invoices only up to 10 percent of the eligible credit generated from information on valid invoices or debit notes uploaded by a supplier.

The recently notified amendment in the Central Goods and Services Tax rules brings down the input tax credit from 20 percent to 10 percent on invoices where the details have not been uploaded by a supplier.

The amendment also allows GST commissioners to disallow utilisation of input tax credit if an invoice has been generated fraudulently from a non-existent company or without any supply of goods or services. Experts told BloombergQuint that this move is aimed at addressing GST leakage and to curb improper use of tax credits.

Here are the key implications.

What Does The Amendment Say ?

The GST regime functions on the concept of input tax credit. Simply put, this mechanism allows a person to reduce the tax paid on inputs from his output tax liability. Originally, input tax credit was to be calculated after matching invoices uploaded by the seller and the buyer but invoice-matching has not yet been implemented due to technical limitations in the back-end architecture and accompanying issues.

The available credit is currently reflected in an electronic credit ledger that is generated on back of invoices from an ‘eligible’ supplier.

“The GST rules did not put any limitation on utilisation of the input tax credit reflected in the electronic credit ledger. The limit was capped at 20 percent in October this year and has now been further brought down to 10 percent,” explained Anish Tripathi, an independent GST consultant.

The rules also grant powers to a commissioner to decide or vary the conditions for use of the credit available in the electronic cash register.

As per the amendment, a commissioner may not allow debiting of amount in the electronic register for discharge of tax liabilities or claim of a refund of any unutilised amounts in the tax register if tax credit is:

  • Availed fraudulently based on invoices from a non-existing or shell entity.
  • Generated without any supply of goods or services.
  • Emanates from a taxable supply and the tax chargeable on such invoices has not been paid to the central government.

The combined measure of limiting credit thresholds and increased powers have two-fold objectives. “These measures are being implemented with a view to mitigate leakages and evasion after the revenue authorities have detected increasing instances of fraudulent utilisation of Input Tax Credit,” Uday Pimprikar, EY India Partner and National Leader—Indirect Tax, told BloombergQuint in an emailed statement.

And while that may help boost sagging GST collections, it will also impose a new hardship on legitimate businesses.

The measures impose a much higher degree of responsibility on a taxpayer and would result in higher working capital requirements and material risk of operational disruption if not handled well. These measures are changing the GST compliance landscape entirely and taxpayers need to re-evaluate their existing work processes related to taxes at a conceptual level. 
Uday Pimprikar, EY India Partner and National Leader—Indirect Tax

Effects Of Lower Thresholds On Business

Experts that BloombergQuint spoke with had varied opinions on the impact of this amendment on businesses. While some welcomed the changes, others cautioned that the revised thresholds would cause liquidity concerns for small businesses.

“Lowering the threshold to 10 percent will result in more liquidity for the government but will impact both large and small businesses as they would have to deploy more capital,” Sameer Jain, managing partner at PSL Advocates, told BloombergQuint.

“Businesses may face operational hindrances as they will have to rely on compliance on the part of suppliers. Timely compliance would also be dependent on whether the supplier is organised and compliant,” he said.

The government’s move indicates that this is the first step for introduction of major changes in the GST next year. While large organisations can mitigate the risk, small businesses may largely face hiccups.

Incorrect availment of ITC can result in heavy interest liability of 24 percent. Businesses will thus have to implement strong internal controls to identify and rectify gaps between the form GSTR-2A and the ITC register to ensure timely and correct availment of credit. Implementing strong internal controls will ensure seamless transition to the new return filing system that will be implemented in the year 2020.
Jigar Doshi, Executive Director, SKP Business Consulting

Also read: GST Non-Compliance: Officers Can Attach Assets, Cancel Registration

Push To Minimise Frauds

The government had estimated GST revenue to increase by 13 percent in fiscal year 2019-20, instead the growth so far has been well below the targets.

In order to boost revenue, the government has been trying to address rising instances of suspected tax evasion by implementing stringent measures and stricter enforcement of the GST law. It has also tried to address the rise through a series of recent amendments. Minimising fraud is a central theme in all such steps. And there are compelling reasons for it.

“Data seems to indicate that at an aggregate level, industry has been claiming significantly more credit than is logically due,” Anish Tripathi, an independent GST consultant, said. With the sustained push on data analytics, and deep inter-departmental sharing of information, there is an unprecedented number of suspicious transactions that are getting red-flagged, he said.

Overall data indicates that 80 percent of the monthly GST collected gets consumed as input tax credit, whereas most experts opine that this number should not be more than 60 percent in an economy like India. The GST department is tightening the rules to curb rising malpractices and fraud. This is an unfortunate fallout of the cat-and-mouse game being played, where the department tries to keep up with tax defrauders, and unfortunately honest taxpayers get caught in procedural nightmares. 
Anish Tripathi, Independent GST Consultant

Gearing Up For Invoice Matching System

The move to lower the ITC claim threshold heralds the next step—implementation of invoice-matching.

“The whole idea behind implementation of GST was to create a seamless system based on the concept of information symmetry and tax credit,” Ankit Jain, partner at Ved Jain and Associates, said, adding that owing to its complex nature, invoice-matching had to be deferred and has not been fully implemented till date.

The government intends to implement invoice matching from April 1, 2020 and the lowering of the threshold to 10 percent is the first step in that direction to prepare the industry. Given the thrust of government on invoice matching, small businesses must gear up for the challenge. While this may create initial hassles, businesses can mitigate it by ensuring that suppliers file timely returns. Suppliers with a track record of timely returns will surely become more preferable.
Ankit Jain, Partner, Ved Jain and Associates
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