An analysis by the goods and services tax (GST) department showed that as much as 39% or Rs. 2.5 lakh crore of input tax credit (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 and underscored the need for more measures to check tax evasion and fraud.
At its 38th meeting here on Wednesday, the GST Council decided to restrict ITC to 10% of the amount shown in the Form GSTR-2A by the suppliers. Only a month ago, the government had amended the above rule to restrict credit to 20%.
Tax officials said that a circular would be issued to field formations soon asking them to act against entities in whose cases it has been established that ITC claims were based on fake invoices. In such cases, where credit availed is established to be fake, the tax department would fully block ITC instantly, they said. ITC would also be summarily blocked in case the firm claiming the credit is found to be non-functional.
Additionally, any excess claims as transitional credit would also be blocked to the extent of unlawful entitlement. Further, the circular would also allow officials to block credit for the supplies that have not been used in the furtherance of business.
However, experts said that not all mismatched credit amount could be attributed to frauds. "The mismatch in credits between various GST returns can be mainly attributed to frequent changes in the returns, filing requirements, time lines, etc. While this will come down as GST becomes more stable, there would always be some mismatches on account of timing issues," said MS Mani, partner at Deloitte India.
Many GST Council members, especially West Bengal finance minister Amit Mitra, have identified revenue leakage as the major reason for slowing GST collections. He wrote to Union finance minister Nirmala Sitharaman earlier this week, arguing "the solution of additional resource mobilisation lies not in tinkering with rate structure but in focusing on anti-evasion and fraud detection measure".
Senior indirect tax officials have estimated that the annual GST fraud could be as high as Rs. 90,000 crore.
In another revenue augmentation measure, the GST Council allowed a one-time amnesty from late fines for taxpayers who haven't filed the GSTR-1 that contains details on outwards sales. However, non-filers have to complete the process by January 10 next year. Failing this, such entities won't be able to generate e-way bill if they fail to file returns for two consecutive years.
Late filing of GSTR-1 also leads to mismatch as suppliers' invoices don't show up for matching. During the May-October period, only once did more than 60% of eligible taxpayers file GSTR-1.
"The government is tightening the gap for every taxpayer to claim the credit on the premise of fraudulent activities. However, the variance could be explained by other reasons, including non-availability of qualified manpower to match on monthly basis, delay in the fling of GSTR -1, technical glitches in tax filings and MSME filers filing on a quarterly basis," said Rajat Mohan, senior partner at AMRG & Associates.