Rules for input tax credit tweaked

In an effort to curb the menace of fake invoices and boost cash flow, the government has limited the input tax credit (ITC) to be availed by Goods and Services Tax (GST) assessees, in case the details have not been uploaded by the supplier. However, the apprehension is that it will increase the work load for assessees.

The existing system prescribes assessees to file two return forms — GSTR 1 (outward sales with tax liability) and GSTR 3B (summary returns with final tax payment). Since, both are not auto linked, this could result in showing higher liability, claiming higher input tax credit and paying less tax in cash.

In other words, irrespective of the credit being visible in GSTR 2A (auto generated return for purchases), the service recipient used to claim credit without any restriction subject to having the invoice copy and satisfying other conditions laid down under the law.

There is feeling that one of the reasons for availing higher input tax credit on the basis of fake invoices was the mismatch between the two — GSTR 1 and GSTR 3B. This was also affecting the government’s revenue.

Now, things will change. Based on the new notification, that Input tax credit claimed in GSTR 3B in respect of vendors who have not uploaded invoice details at GST portal will not exceed 20 per cent of the total eligible credit.

Pritam Mahure, a chartered accountant said, “For example in the month of April, the input tax credit available (as per books) is ₹1,500. Out of this, certain vendors, wherein input tax credit involved is say ₹500, have not filed their GSTR-1. Now, due to the amendment, the buyer can avail himself of ITC only to the extent of ₹200 (i.e. 20 per cent of ₹1,000).

However, experts feel there still will be some pin pricks. First, it is not clear that whether 20 per cent means per supply or of all supplies taken together. Secondly, going forward, it will be mandatory for the buyers to match the ITC claimed with the details uploaded by the vendors. Which actually means that companies need to monitor whether the suppliers are uploading their returns on regular basis. Most companies are likely to feel the pinch of the change, says Mahure.

Harpreet Singh, Partner at KPMG, said that though it appears that the 20 per cent condition is to be complied with monthly, taxpayers may still decide to pursue reconciliations on yearly basis in order to reduce the compliance burden.

However, this may increase the interest cost arising on account of not undertaking monthly reversals. Also, “it remains to be seen if the said condition is to be complied separately for each nature of tax (i.e. IGST, CGST, SGST/UTGST) or not,” he said.

Change in the system is critical especially after the increasing menace of fake invoices. Last month, the investigative arms of the Finance Ministry conducted a joint operation against exporters who were claiming refund of Integrated Goods and Services Tax (IGST) fraudulently.

The IGST is levied on inter-State movement of goods. It was found that ITC of more than ₹470 crore against invoice value of approximately ₹3,500 crore was bogus/fake.

In a reply to a question in Lok Sabha, the government said that during 2018-19, 1,620 cases of fake invoice(s) involving fraudulent ITC of ₹11,251 crore booked by Central GST authorities. Similarly, the first three months of the current fiscal saw 535 cases involving an amount of ₹2,565 crore.