The Goods and services tax (GST) authorities have blocked input tax credits (ITC) claimed by thousands of businesses to the extent these claims are not corroborated by invoices uploaded by their suppliers, multiple tax practitioners and businesses told FE.
While the government had indeed announced that the credit restrictions would be implemented from January 1, for most of the affected businesses, especially for smaller ones, the move could result in a serious cash crunch, as they can now meet the tax liability for the rest of FY20 only through cash.
Though no estimate is available of how much the blocked ITCs would add up to, given that the credits to thousands of firms have been curtailed and the amount in a large number of cases are in crores, credits worth many thousands of crores appear to have been denied.
Among the firms whose unmatched ITC claims have been blocked in their electronic cash ledger are social media giant Facebook. Godrej Housing, Duroflex are too among who have been hit by the policy. An email sent to Facebook remained unanswered.
An analysis by the GST department showed that as much as 39% or Rs. 2.5 lakh crore of ITC claimed by taxpayers in FY18 remained unmatched with the invoices uploaded by their suppliers. Though the gap had come down to 13% (Rs. 1.7 lakh crore) in FY19, it was still very large and unacceptable to the department.
The government’s stated intent behind the move is to curb credit claims based on fake invoices. The move could improve GST collections significantly for the next two months owing to increased cash payment by taxpayers and aid the government’s efforts to bridge the perceived tax revenue shortfall (against the revised estimate in the Budget). However, experts said that gains to the exchequer could gradually taper off as large number of missing invoices will get reconciled at a later stage. All unmatched invoices cannot be attributable to fraudulent practices, tax experts feel.
In October, the government inserted a a clause in GST rule saying that a taxpayer filing GSTR-3B (monthly summary return) can claim provisional input tax credit only to the extent of 10% of the eligible credit available in GSTR-2A. The eligible credit is only against those invoices which show up in a taxpayer’s GSTR-2A, which is possible only if the said assessee’s suppliers file and upload all relevant sale bills in their GSTR-1 (which contains details outward supplies).
If ITC claimed by a taxpayer in GSTR-3B for a given month is, say, Rs 100 and the invoices uploaded by the suppliers are only worth Rs 80, then ITC of Rs 20 does not show up in GSTR-2A in the form of corroborating invoices. So the total credit available to the taxpayer in the case will be Rs 88 (i.e. Rs 80 plus 10% of Rs 80).
Another expert said that the variance between credit claimed in self-declared monthly GSTR-3B and GSTR-2A return could also arise from various issues including non-availability of qualified manpower to match invoices on a monthly basis, technical glitch in tax filings and the MSME filers filing GSTR-1 on a quarterly basis. Late filing of GSTR-1 also leads to mismatch as suppliers' invoices don't show up for matching. The compliance rate for GSTR-1 filing has hovered around 65-70% in recent months.
"Tax credit blockage by tax officers without any notice and hearing is spreading tax terrorism at the grass root level, although it is expected to pump up the revenue collections in February and March. However, this would be mitigated in succeeding months," Rajat Mohan, senior partner at AMRG & Associates said.
Additionally, the GST administration has also started clamping down on taxpayers which have not filed GSTR-3B for long periods of time by asking the assessees’ bank to freeze their account. Tax practitioners said that several such notices have been received by assessees. One such notice seen by FE has raised a payment demand on the bank branch used by Hyderabad-based assessee. It asked the banks to ‘attach all the current/savings A/c./FDR/TDR and lockers’ of the taxpayer who has failed to file GSTR-3B for 20 months and owes Rs 1 crore in taxes.