Input Tax Credit Under the CGST Act & Draft Rules - Is it seamless?
This paper has been written purely as a good and honourable citizen of India wanting us to reach the pride of place in the world tomorrow.
The GST is said to be the biggest tax reforms in indirect taxation. The merger of 11 taxes; reduction in 200 + rates to less than a dozen; lesser compliance burden to the traders, manufacturers and some service sectors; the start of breaking down the barriers between the States- one unified market; reduction in costs – making goods competitive especially for exports are some objectives which are certainly met. To some extent the ease of doing business has been advanced and costs of majority of goods and services are bound to come down. The rampant business of fake bills, cash economy and widespread corruption in the assessment and audit wing of VAT, Central Excise or Service tax would also be curtailed.
One of the main objectives of GST was to avoid cascading of multipoint duties to be avoided. Now cross credit between the trading and service sectors was achieved with ST credit for traders and VAT credit for service providers due to subsuming of the 2 taxes.
However the concept tax credit which was promised to be seamless under GST is far from the truth. The blockages/ exclusion, artificial barriers in the way of free-flowing credit are many.
Discussed below are some of the major / shortcomings along with possible solutions:
The other taxes / rates- State Excise duty, Stamp Duty, VAT & Central Excise on major petroleum products were also to be subsumed. It is estimated that these account for more than 40% of the revenue to the States/ Centre and though used in business are not set off able.
Suggestion: This anomaly needs to be rectified as soon as possible. All States would surely gain due to the sharing of service tax revenue as well as the fact that the shadow economy is being replaced by the compliant. ( orders are shifting as consumption may not decrease significantly) Those in the parallel / cash sector are converting into the mainstream of paying the taxes. Once the trend is clear States need to allow all those goods used in business to be subsumed fully.
The exclusion of electricity also ensures that the taxes/ duty and in future GST paid on the goods and services going into the generation and distribution of electricity would be lost.
Suggestions: This should be included as soon as possible.
The credits which were blocked in the earlier cenvat credit rules and input tax credit in VAT regime are largely continued. Construction, motor vehicles, telecom towers, pipelines for gas, business expenditure to attract and retain talented employees and some minor credits. This goes against the stated stand that the credits would not be restricted.
Suggestion: No need to be penny wise pound foolish. Government wishes to say we trust you and wish to benefit you in your business. Carrying forward and in some cases further denial of credit has experts saying in credit the worst parts of VAT and Cenvat Credit have been retained.
The matching concept in the opinion of the paper writer would not be practicable in the state it is for the small and medium enterprises as it involves monthly reconciliation, follow up and timely uploading of transaction level details. Most such entrepreneurs were used to yearly compliance exercise, now a monthly exercise in survival would be there till everyone learns to understand the law, understand accounting and allocate resources for dealing with mismatches. Nowhere in the world this type of invasion into the privacy of business has worked. In some countries the VAT is the difference between sales and purchase in essence and nothing more. Businessmen need not meet any tax expert. In GST from registration decision, transition, filing monthly returns after due reconciliations.
It is even worse that for mistakes of the supplier of not making full payment or filing returns or not replying to the sms / mail or for the time being financial constraints of the supplier the customer would suffer. Several Apex courts judgments have adverted to this concept. This matter may also see renewed challenges with the fundamental right to do business and equality being possibly trampled.
Suggestion: The matching concept could be ONLY for transactions beyond Rs. 25,000 of GST in the 1 st year. This could be reduced to Rs. 10,000 in year 2 and then to Rs. 5000 in year 3. Alternatively, the matching would not be applicable for claim of credit for businesses upto a turnover of Rs. 10 Crores. Those above presumably could invest in a good ERP which would take care of the compliance.
The formulae for calculation of transaction level classification of inputs used only for exempted, only for taxable, common for all three taxes ( CGST, IGST and SGST) at one level on private usage and later on use for exempted and taxable supply is very complicated. It is felt that the drafter have lost sight of reality in India. This method solves the uncertainty of the earlier rules which provided for several methods which appeared to be valid. This is certainly not simple and non compliance as experienced in Service tax / Central Excise with every 3 audits having an objection on %age of Rule 6 would continue. This borders on the ridiculous and such complicated formulae’s worked every month and again in the end of the year would bring frustration to every dealer who has exempted products/ services.
This would ferment litigation and sense of being cheated of due credit by the tax payer.
Suggestion: Adopt some simple and real method to reverse some portion and of letting go small differences. The value of land sale and value of construction do not require the same inputs, capital goods and services to be consumed. The proportion could be 1: 50 or even 1: 500 in metros. But here the reversal of credit would be proportionate!!
The earlier fetish with targets and safeguarding the revenue should be jettisoned and fairness and simplicity are the order of the day for progress. Only the taxpayer to be made accountable is not really fair. To what extent are the policymakers and tax administrators made to pay for their monumental mistakes made day in and day out? Greed leading to closing down of tax compliant assesses not willing to toe their line may continue if such complicated laws are enforced.
The delayed payment over 180 days leads to credit being payable as output along with interest. On payment, the credit is available. Interest, however, does not accrue to the supplier. A case of unjust enrichment by the revenue.
Suggestion: This needs to be corrected by ensuring the money either goes to the supplier or interest is not collected.
Everyone knows that the law was drafted by the executive and not by experts or by the active involvement of the trade and industry. Even the professional institutes have only been restricted to offer comments to the model law and some of their suggestions considered. GST law reeks of revenue bias and is unfair to the tax compliant.
The Government should make an enabling environment based on the premise of trust. Most of the present drafters of the GST law are the cream of the revenue but the law is still being written for the evader/ non tax compliant. This bias needs to be demonstrated to be removed by doing away with complicated provisions would only provide a handle for the errant tax payer to avoid taxes and the dishonest officers to continue to have ample opportunities to harass the tax compliant.
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