India could face a tax landmine with authorities beginning to question input tax credit claimed by companies in lieu of Goods and Services Tax (GST) paid by their vendors. The authorities have already started sending notices to businesses, confirming fears that scrutiny will increase in the new financial year as the government looks to plug leakages. While paying tax on any output, you can diminish the tax you have already paid on inputs and pay the balance amount referring to input tax credit (ITC). Everyone has to pay taxes on the purchase of a product / service from a registered dealer and collect tax on selling. So adjusting the taxes at the time of purchase with the amount of output tax and balance liability of tax has to be paid to the government which is called utilization of input tax credit.
Who can claim ITC?
A person registered under GST can claim ITC only if he fulfills all the below prescribed conditions as follows:
- Returns have been filed.
- Dealer must be in possession of tax invoice.
- The said goods / services have been received.
- Tax charged should be paid to the government by the supplier.
- On receiving goods in installments, ITC can be claimed only when the last lot is received.
ITC will not be allowed on claiming depreciation on tax component of a capital good.
New rules for ITC
The government has changed the input tax credit utilization procedures where the new rules are fairly simple. Taking in consideration, the new sections inserted after section 49 of the CGST Act are as below:
“49A. Notwithstanding anything contained in section 49, the input tax credit on account of central tax, State tax or Union territory tax shall be utilized towards payment of integrated tax, central tax, State tax or Union territory tax, as the case may be, only after the input tax credit available on account of integrated tax has first been utilized fully towards such payment.
49B. Notwithstanding anything contained in this chapter and subject to the provisions of clause (e) and clause (f) of sub-section (5) of section 49, the government may, on the recommendations of the council, prescribe the order and manner of utilization of the input tax credit on account of integrated tax, central tax, state tax or union territory tax, towards payment of any such tax.”
Comparing the old and new law on GST set-off
The below tables highlighted the differences between the old and the new system of set-off of input tax credit:
Following are the existing set off rules:
|Payment for||First set off from||Then set off from|
|IGST||IGST||CGST and SGST|
In contrast to above, below are the new GST rules:
|Payment for||First set off||Then set off|
|IGST||IGST||CGST and SGST|
How the new rules impacted the business
Indian businesses that paid most of their GST liability using input tax credit or reported significant variation in turnover, a move that has irked industry and prompted it to petition the authorities against such tactics. Even if the credit is available and could have been utilized fully, the new system will not let you use the same for the set-off. Since CGST credit has been not utilized at all, this put an additional burden on the amount of SGST to be paid, as CGST credit cannot be utilized to pay SGST. Moreover, it is noticed that there can arise a possibility of a carry forward of input tax credits of SGST or CGST remaining unutilized during the tax period. This as a result affects the working capital of your business as your cash outflow will increase from month to month due to the new rules of set-off. However, from the Government’s point of view, it is immediate revenue coming in, in the form of cash. Thus, it helps in mobilizing the economy.
If you would like to know more about input tax credit or need any assistance in filing of GST returns, GST assessments and GST audits, our team of experts can assist you in complying with the GST regime.
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