At the core of the input tax credit (ITC) system lies a problem, which is the subject of litigation across High Courts: the recipient of goods and services being denied ITC because of slip-ups on the part of his supplier or those upstream in the value chain. The law under which ITC is held up is Section 16(2)(c) of the Central Goods and Services Act, which says that no buyer can claim input tax credit on supplies unless the “tax charged in respect of such supply has actually been paid to the Government...” This simply means that the recipient is at the mercy of the vendor, while being in no position to ensure that the latter pays taxes to the government; he can merely assume that he has done so on the basis of the latter’s GSTR 1, which is a declaration of sales. The GSTR 3B is the vendor’s tax payment document. It is not unusual for the tax paid under the latter document to be less than stated in GSTR 1, as a result of which the buyer’s ITC claims suffer – a cascading effect of another kind. In order to address this problem, the Centre decided to invoke the provisions of Section 75 (12) against the vendor, where the authorities can swing into action and claim the difference, while allowing the recipient to claim input tax credit on the basis of the GSTR 1 declaration. The trouble here is that this too smacks of excess: the vendor too should be given a chance to explain discrepancies. A January CBIC notification acknowledges this aspect, but the assessing officer has considerable discretion to accept or reject the explanation. It is important for the authorities not to assume the worst-case scenario – of buyers and sellers colluding so that one claims exaggerated credit from ‘fake’ invoices and the vendor takes a cut from that benefit, without the transaction perhaps even taking place.

Bonafide businesses should not bear the brunt of tax excesses for the actions of a minority, who pull off their frauds, anyway. The move to dilute Section 16 (2) (c) is well intentioned, but the implementation of Section 75 (12) needs some fine-tuning. The discrepancies at the vendors’ end could be innocuous, as the January 7 notification suggests.

Meanwhile, the fake invoice scourge refuses to disappear despite e-invoicing coming into play, albeit for high value transactions. This month, the Directorate General of GST Intelligence unearthed a fake invoicing syndicate operating 636 firms issuing fake invoices (not backed by transactions) amounting to ₹4,521 crore with a tax implication of ₹741 crore. Fake invoicing has come down with improvements in compliance (it was ₹1.19 lakh crore in the first three years of GST), but GST authorities have pointed to ITC fraud exceeding ₹4,000 crore in the April-June quarter of this fiscal alone. The coordination of GST data with income tax returns is expected to plug gaps and improve revenue collections, but the focus should be on the big fish. For smaller units, formalisation must come with incentives rather than compliance costs.

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