The Government as a part of a 40 years old unfinished agenda of implementing value added tax in India merged 11 indirect taxes of the Centre and States. This was done on a consensus approach to get all States on board which lead to the pristine principles of an ideal GST to be diluted quite substantially. The Goods and Service Tax was been implemented on 1st July after Constitutional Amendment in 2016. Some transaction / products like electricity, 5 petroleum products, stamp duty, liquor have been kept in out of GST in line with the States demand and considerations of possible fall in gross revenue. Some of them may over period of time be merged. Presently 5 petroleum products are being seriously examined which do not require any constitutional amendment and only require the GST Council to recommend and Centre and States to agree. This would reduce cascading significantly.
The main objectives of GST are:
• Enlarge the tax base now that India is moving towards being a developed economy (many exemption done away with),
• Encourage the parallel economy which presently contribute less on nothing to the tax to join the mainstream and pay taxes ( total tax payers increased from 75 Lakhs to 100 lakhs),
• Avoiding the cascading impact of multiple levies. i.e tax on tax (merged Central and State taxes + removed some blocked credits),
• Reduce the multiplicity of taxes on transactions and lead to a common market (from 300 + rates to less than 10),
• Reducing the cost of compliance for Government (reduction in tax administrative numbers for sure) and assessee ( may not be in the initial period) and
• Reduce the interface between the taxpayer and the administrators by using information technology. The experience in the last 10 months on the total collections has not been very encouraging though the economy continues to grow at more than 7% per annum. GST has helped the direct tax collections to clock a 16% growth to some extent. The GST collection post July 2018 till ate however has not been up to the expected level compared month to month ( March 17 to March 18) even though the number of registrants has increased by more than 30%.
The parallel economy has registered but not paying the tax due, maybe availing excess credits in transition and in normal course and awaiting the decision on reverse charge from unregistered suppliers. The technology infrastructure was pushed through without the normal user testing. The ill effects of the big bang reforms with credit matching instead of a graded implementation has led to many compromises with frequent amendments and government is unable to implement GST effectively.
The improvements expected in the coming months could be as under:
1. Simplify further the return filing process so
that at least the business to business part of the economy is enabled to
transact business freely,
2. Build capacity and expand the IT infrastructure to be able to manage billions of transactions and start data mining to identify the tax evaders.,
3. Continue to broaden the base,
4. Correct the several restrictions and drafting lacunae,
5. Come up with an alternative for the credit matching mechanism,
6. To win back the trust of the tax payer with simpler law over period of time,
7. To put IT based identification of tax leakage areas and identifying the errant tax evader and
8. Get the annual GST audit put in place to identify and correct the transitionary errors as well as errors due to lack of understanding of the law.
Input Tax Credit (ITC)
The principle of set off is that the GST paid at the earlier stage on supplies received (capital goods, inputs, input services) is allowed as a deduction from the tax payable. In normal businesses the eligible credits are reduced from the cost of procurement/ purchases. In most businesses the margins would be less than the eligible credit which may be as high as 17 whereas margin is only 4-7%.
In the earlier regime only in Central Excise and service tax among the central levies the set off was available. VAT input tax credit was allowed for the procurement within the State. The service provider was unable to get the VAT credit and the traders the service tax credit. Most of the dealers did not get registered under central excise to enable themselves to pass on the duty of excise or the additional duty of customs (CVD) or the special additional duty (SAD) when they imported or dealt with imported goods.
There were some indirect taxes where credit was not available for adjustment and payment of net amount. That is to say the whole tax as applicable was payable as under:
1. Basic Customs Duties
2. Luxury tax
3. Betting & Gambling tax
4. Octroi/ Entry Tax
5. Entertainment Tax
There were some taxes which were not available for credit at all even in VAT or Central Excise/ Service Tax as under:
1. Basic Customs Duty/anti dumping duty/safeguard duty
2. Central Sales Tax (whether or not against the 'C Form')
3. Luxury Tax
4. Octroi / Entry Tax (In some States this was adjustable to the VAT)
5. Betting & Gambling Tax
6. Entertainment Tax
7. Special additional duty (SAD) credit was not available to trader. However there was a system of refund to be claimed from Customs after goods are sold on payment of VAT due to the fact that the SAD was in lieu of VAT/ CST and credit was not available.
Now in GST the ITC has been expanded partially since there is no indirect tax other than GST. Credit is available unless restricted. To this extent the taxes on taxes is also avoided. However where no GST is paid then credit would not be available. The excluded activities where GST is not applicable as on date are:
a. Electricity presently a State subject
b. Taxes on immovable property also a State subject.
c. 5 Petroleum Products which are substantially used in businesses: Petrol, Diesel, Aviation Fuel, Natural Gas............................ The industry would like that the GST be imposed on all the above as the taxes paid on expenditure in furtherance of business on the above activities are quite substantial.
Presently the credit lost in the above could be more than Rs.2 Lakh crores! In the past IDT regime also this credit was not available but moving to GST it should have been. May be enabled in this year. The eligibility of adjustment or utilisation of the credit of IGST/ CGST & SGST of one State needs to be understood.
The State GST would be eligible for credit for that State which is logical. Credit would also be available for payment of the GST in that State. The State GST would also be available for payment of IGST. The CGST collected in a State would be available for credit and for adjustment when paying the State GST. Central GST as understood collected by a State would not be available for CGST of another State. For a multi state tax payer the CGST of Karnataka may not be usable in Bihar for payment of CGST. However similar to SGST the CGST in a State can be used for payment of IGST. IGST can be utilised for adjustment and payment of IGST, CGST or SGST in that State. It means that IGST credit is preferable to either SGST or CGST.
There is a restriction on order of utilisation which needs to be kept in mind. IGST - Used first for IGST then if balance available for CGST and if balance further available for SGST. CGST of State - Used for CGST in that State first and if balance is there then for payment of IGST. If balance available then can be carried forward. SGST of State - Used for SGST in that State first and if balance is there then for payment of IGST. If balance available then can be carried forward. Eligibility of Credit GST was to completely remove cascading of multipoint duty as well as restrictions built over a period of time. In the earlier regimes the Cenvat Credit as well as VAT ITC was restricted for several items.
The credit is available subject to conditions as under:
1. He is having a tax invoice or other tax paying document which has been uploaded by the supplier,
2. He has received the supply or goods or services,
3. Tax has been paid on such supply ( by the supplier)
4. Return is to be furnished by the receiver,
5. He is to pay the supplier within 180 days. If not credit and interest thereon would be added to his output liability. Credit of tax available on full payment at any later date.
6. In regard to capital goods where depreciation is claimed on the GST credit availed, then credit is not available.
7. The time limit for credit is the due date for filing of the return of September of next financial year or furnishing of the annual return whichever is earlier. The law also provides for enabling credit of input tax and restrictively capital goods credit in case of various special circumstances such as a composition dealer, a small trader or one who is exempt becoming taxable, one who has taken registration, certificate from a chartered accountant etc. subject to conditions. GST is a procedural law and requires compliance of the rules as prescribed. The vigilant only would be able to avail optimum credit.
Blocked/ Restricted Credits
We examine the continuing restriction under section 17(5) of CGST Act and extent briefly as under:
i. Motor Vehicles and Other Conveyances. Exceptions where credit would be available are:- if used for transportation of goods - if used for making taxable supplies (only for such service providers) of: further supply (distributor of MV); transportation of passengers (bus operators, cab operator )or for imparting training ( driving, flying etc) Note: The conveyances for transportation of goods could cover cars, buses, boats, airplanes etc. The industries who could claim the credit for transportation of goods could be any who use them for business. Commonly the transportation / logistic industry, construction industry, mining, manufacturing, catering etc. In the past they may not have availed the credit. The credit of lease of motor vehicles and other credits related to motor vehicles like insurance, repair etc used in furtherance of business would be available.
ii. Works Contract for immovable property other than plant and machinery or where the service is used further for works contract.
iii. Goods and services for construction of immovable property other than plant and machinery for himself. This means that a builder cannot avail the credit for inputs of a contractor for a building meant for renting or manufacture of taxable goods. However if the contractor / developer is selling the property (before completion) then he can avail the credits of goods or services used.
iv. Membership of a club, health or fitness centre- are barred even if used for furtherance for business.
v. Travel benefits to employees on vacation such as leave or home travel concession
vi. Food, beverages, outdoor catering, beauty treatment, health services, cosmetic/ plastic surgery unless used for making a further supply in the same category or as an element of composite/ mixed supply.
vii. Rent a cab, life insurance and health insurance unless used for making an outward supply or the Central/ State govt notifies that it is obligatory for employer to provide.
viii. Goods or services used for personal consumption.
ix. Goods lost, stolen, destroyed, written off or disposed off by way of free gift or free samples.
The above provisions are subject to different interpretations and have been hotly disputed with most issues being in favour of the tax payer in the past. Auditors may refer to an analytical commentary or the background material on GST of May 2018 of the Institute of Chartered Accountants of India. firstname.lastname@example.org to understand the compliances as well as the benefits. Some of the issues may have to be revisited if the proposed amendments are carried out. The person who has opted for composition would not be eligible for any credit till he opts out at which time he would be eligible for credit of the stocks in hand. The non resident dealer who imports goods can utilise the credit of such goods if eligible otherwise. The person who receives a notice consequent to evasion (sec 74) or transports goods liable to GST (sec 129) without payment of tax or such goods are confiscated (sec130) shall not be eligible for ITC. This is particularly a very harsh provision in the light of the complexity, frequently changing law and quasi judicial orders with total revenue bias. Note: The credit should only be denied to a person who uses goods or services for personal/ private use. All other denials are unreasonable and do not move to a seamless credit system. There could be many genuine cases where due to lack of knowledge of the complex provision one makes an error.
Further the evader would be liable for stringent penalties, interest and further action of prosecution. The denial of credit could close the trade or business which should not be the intention of any tax law. This is especially true when even the senior tax officers openly share their lack of knowledge of this new law after more than 1 year.
The assessee maybe having non-taxable or exempt supplies or use the goods for non-business purposes or a combination. In such cases he would be eligible for only credit to the extent used for taxable and zero rated (direct exports and SEZ) supplies. This would be as per the rules in this regard. The value of exempt supplies would include supplies on which recipient is liable to pay under reverse charge value of securities, sale of land, sale of completed building. For banking, financial institution or a non banking financial company an option of avail 50% of the eligible ITC on capital goods, inputs and input services is available. One can opt for it once a year. This 50% would not apply for transactions within the entity where GST has been paid by the entity.
The fact that GST was applicable from 1st July required many provisions for enabling continuation of business without impacting or stopping them.
The main provisions in transition are briefly explained as under:
1. Migration of existing tax payers: All those having a valid PAN were provided a provisional registration and after additional information provided a final registration. Those who did not provide the information got the provisional registration cancelled.
2. Carry forward of cenvat by those registered earlier under central excise or service tax as well as ITC under VAT: The compliance under these laws by the unorganised and smaller assessees was quite poor and many made mistakes while filing their form( tras-1) which was closed in November 2017. Courts have interfered and for those who did not file due to issues in uploading have been allowed to file again.
3. Balance of Capital goods cenvat credit: This has also been enabled to the extent of credit not carried forward.
4. Credit on stocks: The stocks in hand with a trader, manufacturer or service provider would be in available as inputs, semi finished goods or finished goods. The tax involved in these goods would be eligible for credit subject to conditions. Two schemes were provided for those who had invoices and those not in possession. Large number of SME have not claimed it (trans-1) and it is understood that many have claimed it excessively.
5. Transition provisions were also there for goods or services in transit, Input Service Distributor balance, centralised service providers, job work, price revisions, refunds, goods on which TDS was deducted under the VAT law etc.
The law provided whether the issue would be under the earlier law or GST. The transitional provisions and their compliance have been done with bye passes due to system restrictions and lack of knowledge on the part of the majority of assessees. Many disputes are expected and Courts would rule to enable many such unfair restrictions.
Some however may not be amended. The cautious tax compliant assessee may get a compliance of transition done in depth to avoid demands in years to come as also claim justified credit carry forward which may have been missed. How to match and avail the credit? A person registered under GST can avail ITC, of tax paid on the supply of goods or services used or intended to be used in the course or furtherance of business subject to restrictions.
According to Rule 36 of the CGST rules, 2017 documents required required for availing Input Tax credit are:
(a) Invoice issued by the supplier of goods and
services or both in accordance with the Tax invoice provisions as per section 31
of CGST Act.
(b) Tax invoice issued by the recipient who is liable to pay tax on reverse charge basis as per section 9(3) and as per section 9(4) of CGST Act 2017
(c) Debit note issued by the supplier as per provisions of section 34 of CGST Act 2017
(d) Bill of entry or any other documents prescribed under the Customs Act, 1962 for assessment of IGST on Imports.
(e) Input service Distributor Invoice or credit note or any other documents issued by an ISD dealer.
Input tax credit would be availed, only if all the provisions in rules are mentioned in the tax invoice and relevant information is furnished by the person in FORM GSTR-1.
Input tax credit would not be availed, in respect of any tax paid pursuance of any order, where demand is confirmed on account of any fraud, willful misstatement or suppression of facts.
The registered person must be in possession of tax invoice, he should have received goods and services or both. Unless, it has been deemed that such registered person has received goods when it is delivered by the supplier to the recipient or any other person on the direction of such person, whether acting as agent or otherwise.
In case goods are received in installments, after receipt of last lot of installment.
In case, a registered person has claimed depreciation on tax component of the cost of capital goods, and Plant and machinery, such portion of depreciation would not be eligible for Input tax credit.
The registered person would not be eligible for taking Input tax credit in case of any invoice/debit notes for the supply of goods or services or both after the due date of filing of an annual return or after September following the end of financial year. The returns have been suspended for the time being relating to matching but care to be exercised has been provided above. It is in the interest of the entity that they reconcile the credits.
How to Raise Invoice?
Invoice is an important part of GST. Sec 31 sets out the timing of the invoice in case of goods and services, continuous supply and revised invoice. The other documents for advance, reverse charge, exception to issue of tax invoice for exempted supplies and composition are also specified. There is no specific format prescribed in the law for raising an invoice.
However the law prescribes the content in tax invoice as under:
a. Name, address and Goods and Services Tax Identification Number of the supplier.
b. A consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters-hyphen or dash and slash symbolized as '-' and '/' respectively, and any combination thereof, unique for a financial year.
c. Date of its issue.
d. Name, address and Goods and Services Tax Identification Number or Unique Identity Number, if registered, of the recipient.
e. Name and address of the recipient and the address of delivery, along with the name of the State and its code, if such recipient is un-registered and where the value of the taxable supply is fifty thousand rupees or more.
f. Name and address of the recipient and the address of delivery, along with the name of the State and its code, if such recipient is un-registered and where the value of the taxable supply is less than fifty thousand rupees and the recipient requests that such details be recorded in the tax invoice.
g. Harmonised System of Nomenclature code for goods or services.
h. Description of goods or services.
i. Quantity in case of goods and unit or Unique Quantity Code thereof.
j. Total value of supply of goods or services or both.
k. Taxable value of the supply of goods or services or both taking into account.
l. Discount or abatement, if any.
m. Rate of tax (central tax, State tax, integrated tax, Union territory tax or cess).
n. Amount of tax charged in respect of taxable goods or services (central tax, State tax, integrated tax, Union territory tax or cess). GST law does not pallow all inclusive price.
o. Place of supply along with the name of the State, in the case of a supply in the course of inter-State trade or commerce.
p. Address of delivery where the same is different from the place of supply.
q. Whether the tax is payable on reverse charge basis; and
r. Signature or digital signature of the supplier or his authorised representative.
A few optional exclusion of a. to r. above have been provided for insurers, banking and financial institutions and non banking financial Companies, goods transport agents and passenger transport. It is important to note that where the invoice does not have the details prescribed it could be said to be defective and penalty for non compliance is possible.
There may be legally valid questions on the availability of credit also for the receiver. Unless the provision is read down by courts or amended this may cause avoidable disputes. How to raise Debit Note/ Credit Note? Debit Notes or Credit Notes are issued when there is a variation in the price and the amount payable by the receiver ( buyer) increases or decreases after the invoice is issued. When the amount payable by the buyer to seller decreases - There can be a change in the value of goods after the goods are delivered and invoice issued by the seller. This can be due to a return of goods or due to the bad quality of the goods delivered, short supply etc. The seller issues a Credit Note as a response or acknowledgment to the debit note. When the amount payable by the buyer to seller increases - When the value of invoice increases, due to extra goods being delivered or the goods already delivered have been charged at a lower price, a debit note is required to be issued. The Debit Note, in this case, is issued by the seller to the buyer.
The tax liability would be adjusted but no reduction in output tax liability of the supplier would be permitted if the incidence of tax and interest on such supply has been passed on to any other person. In business there may be a need to avoid the debit note with GST to avoid additional compliances. This would not have any impact where the buyer is availing the credit and pays GST in cash and not only by adjusting the credits available.
Conclusion: Some of the aspects which maybe relevant to ITC have been collated above. The article above is extracted/ adapted from the GST Audit book in progress as relevant to ITC which would be published 1 month after the audit u/s 35 is notified.