Tax credit rules mar GST


While the passage of the much awaited Goods and Services Tax (GST) Bill in the Rajya Sabha has been termed as one of the major tax reforms undertaken in India since independence that would spur growth and improve ease of doing business, India Inc is not too happy with certain provisions in the draft GST law. Certain clauses relating to the manner of taking input tax credit has caused some serious concern among the business community.

The Section 16 (11) C under the chapter ‘Input Tax Credit’ of the draft model GST Bill states, “Notwithstanding anything contained in this section, but subject to the provisions of section 28, no registered taxable person shall be entitled to the credit of any input tax in respect of any supply of goods and/or services to him unless the tax charged in respect of such supply has been actually paid to the credit of the appropriate government, either in cash or through utilisation of input tax credit admissible in respect of the said supply”.

Under GST, ‘input tax’ is allowed to be set-off against the ‘output tax’ to be paid by the dealer. Input tax is the tax a dealer pays on his local purchases, which may include raw materials, capital goods or other inputs used in his business.

On the other hand, output tax is the tax charged by the dealer on his sale of finished goods to a subsequent buyer in the value chain.

For example, ‘A’ sells goods worth Rs 100 to ‘B’ a manufacturer. Assuming GST rate is 22 per cent, ‘B’ will have to pay Rs 122 to ‘A’. After making necessary value additions ‘B’ sells the finished goods to ‘C’ for Rs 244 (value of goods including profit margin at Rs 200 and GST at Rs 44). Now ‘B’ is required to pay only Rs 22 as tax to the government after taking the input tax credit of Rs 22.

According to the existing provisions under the draft law, the buyer can claim input tax credit only if the seller or provider of the goods or services has paid the tax charged for such goods or services. This has put the onus of ensuring compliance with the customer or buyer of the goods and services.

“This particular clause in the draft GST law seems unfair to the business community and should be removed,” said Pratik P Jain, leader, indirect tax, PwC India. If a supplier has failed to furnish the return on time or pay tax on time, the government should penalise the supplier instead of the buyer. “This clause is especially harsh on small and medium enterprises (SME). Since, big businesses deal with multiple vendors, they might be reluctant to buy from small vendors fearing non-compliance. The volume may shift to much bigger organised players,” Mr Jain observed.

Echoing a similar view, B. Sriram, partner – indirect tax services at Ernst & Young (E&Y) said it would be little difficult to comply with and the government should either drop this particular clause or dilute it. “Smaller companies will not have the sophisticated technology to track or verify compliance while bigger companies who source components from multiple vendors would find it difficult to track and verify compliance by each and every vendor. This will lead to wastage of time and money,” he said and added the only condition that the government should put forward for claiming input tax credit is whether the buyer has paid the tax on his purchases or not.

The industry has already raised this issue with the ministry of finance and is expected to lobby hard for the removal of this clause before the final bill is approved.

While agreeing that this particular clause would result in temporary complications and hiccups, Nihal Kothari, executive director, Khaitan & Co said there have been several instances where companies were found taking wrong credit by submitting fictitious bills.

“However, the government should use its machinery to recover tax instead of burdening the business community. Let the industry focus on their business,” he said.

However, Mr Kothari pointed out that a similar provision currently exists in value added tax (VAT) enacted by few states. To deal with issues regarding non-compliance, he said appropriate agreements have been signed between buyers and sellers for recourse to recovery of tax paid or retention of certain portion of the tax if it is commercially viable.

Source :

Leave a Reply

Your email address will not be published.

Solve this and then Post Comment *

scroll to top