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Large companies fear losing out on GST credit if vendors, suppliers go bankrupt due to Covid crisis

Large companies fear losing out on GST credit if vendors, suppliers go bankrupt due to Covid crisis

With many small and medium enterprises staring at bankruptcy or severe business disruption due to the Covid-19 crisis, large companies that buy raw material and products from them now have to deal with a new problem: denial of credits if the vendor defaults on paying goods and services tax.

According to the GST framework, large companies cannot claim credits unless their suppliers and vendors have paid the tax. Section 16 of the GST law says that if a vendor does not pay GST to the government, input tax credit will be denied to the buyer.

Companies with a large supplier base across sectors are now reaching out to their vendors to check if there is a possibility of a default from their side.

“The additional liability cast on businesses for ensuring payment of tax by the supplier has been a rising concern since inception because of the practical difficulties in verifying the same and the financial burden even though the tax is paid to vendors,” said Abhishek Jain, a tax partner at EY. “This obligation has drawn attention in these difficult times owing to apprehensions of defaults by vendors with the currently spread financial flu.”

The nationwide lockdown has broken the back of the SME sector. The coronavirus triggered restrictions that shut businesses abruptly and left smaller companies facing a crushing cash crunch. Major raw material and labour shortages along with a demand pullback from the industry created an existential crisis for many.

Industry experts said many large companies have been putting in place some steps to manage the situation.

“Large businesses are considering indemnity arrangements to safeguard themselves from vendor defaults arising from the extended timelines for GST payments and returns provided to smaller businesses. There is also a need to re-evaluate the vendor selection policies based on previous compliance track records,” said MS Mani, a partner at Deloitte India.

According to people aware of the matter, some companies have asked their vendors and suppliers to give them an indemnity letter.

“The letter is essentially a legal document that asks vendors to pay GST on time and be held responsible if there is a GST default or if any interest or penalty is charged to the company due to a vendor’s delay,” said one person.

Input tax credit can be claimed only after a vendor has paid the tax and uploaded the correct invoice on the GST portal. The invoices are matched with the credit eligibility of the company. Full credit is allowed if there is 90% accuracy or if there is a problem with 10% of the invoices.

A few of the larger companies, especially in the automobile and other manufacturing sectors, are not taking chances, experts said.

“Some of the large companies are holding back on payments to vendors and suppliers for two months as a pressure tactic. This is to make sure that they pay up the GST on time and the company is able to avail of tax credits,” said a tax expert who advises large companies.

Source: Economic-Times

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ITC-invoices mismatch: Huge sums sought as GST credit denied

ITC-invoices mismatch: Huge sums sought as GST credit denied

The Goods and services tax (GST) authorities have blocked input tax credits (ITC) claimed by thousands of businesses to the extent these claims are not corroborated by invoices uploaded by their suppliers, multiple tax practitioners and businesses told FE.

While the government had indeed announced that the credit restrictions would be implemented from January 1, for most of the affected businesses, especially for smaller ones, the move could result in a serious cash crunch, as they can now meet the tax liability for the rest of FY20 only through cash.

Though no estimate is available of how much the blocked ITCs would add up to, given that the credits to thousands of firms have been curtailed and the amount in a large number of cases are in crores, credits worth many thousands of crores appear to have been denied.

Among the firms whose unmatched ITC claims have been blocked in their electronic cash ledger are social media giant Facebook. Godrej Housing, Duroflex are too among who have been hit by the policy. An email sent to Facebook remained unanswered.

An analysis by the GST department showed that as much as 39% or Rs. 2.5 lakh crore of 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.

The government’s stated intent behind the move is to curb credit claims based on fake invoices. The move could improve GST collections significantly for the next two months owing to increased cash payment by taxpayers and aid the government’s efforts to bridge the perceived tax revenue shortfall (against the revised estimate in the Budget). However, experts said that gains to the exchequer could gradually taper off as large number of missing invoices will get reconciled at a later stage. All unmatched invoices cannot be attributable to fraudulent practices, tax experts feel.

In October, the government inserted a a clause in GST rule saying that a taxpayer filing GSTR-3B (monthly summary return) can claim provisional input tax credit only to the extent of 10% of the eligible credit available in GSTR-2A. The eligible credit is only against those invoices which show up in a taxpayer’s GSTR-2A, which is possible only if the said assessee’s suppliers file and upload all relevant sale bills in their GSTR-1 (which contains details outward supplies).

If ITC claimed by a taxpayer in GSTR-3B for a given month is, say, Rs 100 and the invoices uploaded by the suppliers are only worth Rs 80, then ITC of Rs 20 does not show up in GSTR-2A in the form of corroborating invoices. So the total credit available to the taxpayer in the case will be Rs 88 (i.e. Rs 80 plus 10% of Rs 80).

Another expert said that the variance between credit claimed in self-declared monthly GSTR-3B and GSTR-2A return could also arise from various issues including non-availability of qualified manpower to match invoices on a monthly basis, technical glitch in tax filings and the MSME filers filing GSTR-1 on a quarterly basis. Late filing of GSTR-1 also leads to mismatch as suppliers’ invoices don’t show up for matching. The compliance rate for GSTR-1 filing has hovered around 65-70% in recent months.

“Tax credit blockage by tax officers without any notice and hearing is spreading tax terrorism at the grass root level, although it is expected to pump up the revenue collections in February and March. However, this would be mitigated in succeeding months,” Rajat Mohan, senior partner at AMRG & Associates said.

Additionally, the GST administration has also started clamping down on taxpayers which have not filed GSTR-3B for long periods of time by asking the assessees’ bank to freeze their account. Tax practitioners said that several such notices have been received by assessees. One such notice seen by FE has raised a payment demand on the bank branch used by Hyderabad-based assessee. It asked the banks to ‘attach all the current/savings A/c./FDR/TDR and lockers’ of the taxpayer who has failed to file GSTR-3B for 20 months and owes Rs 1 crore in taxes.

Source: Financial-Express.

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Circular trading & GST evasion charges: Taxman may have to review arrest strategy

Circular trading & GST evasion charges: Taxman may have to review arrest strategy

The indirect tax department that had arrested many promoters for circular trading and escaping goods and services tax may have to rethink its strategy after the Mumbai High Court granted bail to many of them.

The arrests came after the indirect tax department issued notices in February this year and raided premises of several companies for allegedly inflating turnover through fake invoices to shell companies.

People close to the development said that several promoters then approached the criminal bench of the Bombay High Court which granted them bail and sought an explanation from the department. Bail was granted to different people in the past few weeks.

Some industry observers suspect that circular trading may be used to inflate turnover or for bringing in black money to system. Tax experts, however, pointed out that this doesn’t necessarily mean tax evasion and that some genuine businesses are facing trouble on this count.

“We have argued that the entire issue is based on the department’s assumption that the supply of goods should result in movement of goods,” said Abhishek A Rastogi, partner at law firm Khaitan & Co, who represented some promoters in their bail pleas. “The legal principle of revenue neutrality comes into play. In case there is no loss of revenue, the proceedings cannot be non-bailable and cognisable.”

Legal experts said the taxman had upped the ante by arresting promoters in the last few months.

“The GST officers have suo moto converted enquiries into criminal cases by arresting the promoters, which was seldom done under the earlier tax framework,” said Sujay N Kantawala, a high court advocate.


“This is clearly premature as determination of actual tax liability exercise is not carried out prior to arrest. This amounts to clear contempt of binding judgements,” he said.

ET had first reported on March 6 that indirect tax officials had started arresting promoters
following raids and suspecting circular trade.

People close to the development said some sectors tend to get involved in circular trading but it doesn’t necessarily mean there is tax evasion.

A person familiar with the development cited the example of a Mumbai company that is into trading of plastic goods. The said company sold goods to a company based in Pune, which sold the same goods to another company based in Bengaluru. Now, the third company sold the goods to the first, the Mumbai-based firm. All this while, the goods were kept safe at a godown in Mumbai and GST credits were paid on every lap of transaction. The series of sales helped the firms inflate turnover and avail larger valuations and loans, the person said.


Meanwhile, a battery of lawyers are looking at challenging a particular section of the GST law that gives arresting powers to the taxman, people in the know said. A separate petition in this regard could be filed in the coming weeks, they said.

The indirect tax department started issuing notices to several companies in the past few weeks, seeking evidence of all the purchase and sale transactions including the invoices. The department suspects that several companies are merely buying fake bills that help them claim input tax credit and actual buying and selling of goods is not taking place.

Input tax credit is a mechanism whereby a company can set off the GST paid by them on purchases against future tax liabilities. Industry trackers said that in many cases the promoters of such companies had landed in jail.

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Source: Economic Times.
Govt detects Rs 20,000 cr GST evasion in April-February FY19

Govt detects Rs 20,000 cr GST evasion in April-February FY19

The government has detected Rs 20,000 crore worth GST evasion so far this fiscal and will take more steps to check frauds and increase compliance, a senior tax officer said on Wednesday.

Central Board of Indirect Taxes and Customs Member (Investigation) John Joseph further said the department would soon call a meeting of the representatives of the real estate sector to understand transition issues faced by the sector post reduction in GST rates.

The GST Council, chaired by Finance Minister Arun Jaitley and comprising state counterparts, earlier this week decided to cut tax rates on under-construction apartments and affordable housing to five percent and one percent, respectively.

However, builders will not be able to claim credit for the taxes paid on inputs, like steel, cement.

The earlier GST rate on under-construction apartments and affordable housing was 12 percent and eight percent with an input tax credit (ITC), respectively.

On-demand for giving ITC relief to the builders of the under-construction flats which are already built but not yet sold to buyers, Joseph said the real estate sector will have to raise the issue with the urban development ministry.

“You need to talk to them (urban development ministry). As revenue department we cannot give you any benefit of subsidy to that extent,” he said at an Assocham event here.

Joseph said between April-February 2018-19, GST evasion worth Rs 20,000 crore has been detected of which Rs 10,000 crore was recovered.

He said the tax officers on Tuesday detected fake invoice worth Rs 1,500 crore which was used to claim illegal GST credit of Rs 75 crore.

“We have already recovered Rs 25 crore and the rest is on the way,” Joseph said.

Stating that only 5-10 percent of the businesses are “black sheep” and bring a bad name to the industry, he said the government will take more measures to increase compliance, and act against evaders in a way such that genuine businesses do not suffer.

Joseph said the government has been dynamic in rationalizing tax rates since GST rollout on July 1, 2017, while increasing compliance for 1.2 crores registered businesses.

“In future, as GST moves forward, the rates need to consolidate. Across the world, it is one rate, but it may not be possible for us to implement it here… because we have the poorest of the poor and the richest of the rich in the country. “What is good for the richest, cannot be the best for the poor… But five rates converging into two or three, depending on what the Council decides. This is the way forward,” he said.

Currently, GST has a 4-tier slab of 5, 12, 18 and 28 percent, while essential items are zero-rated.

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Source: Money Control.
Companies stare at cash flow problems on account of GST credits

Companies stare at cash flow problems on account of GST credits

A tweak in the rule on availing goods and services tax (GST) credits may create cash flow problems for some companies starting this month. The change is in the way companies can set off tax paid on raw material against those levied on the goods they sell, which is meant to avoid double counting of taxes.

According to the credit utilisation mechanism announced late last year, companies can set off their tax liabilities by first utilising their integrated GST (IGST) credits before availing of their central GST (CGST) and state GST (SGST) credits. Previously, companies could set off IGST credits against both CGST and SGST.

Tax experts said this has started to result in situations where companies end up paying GST in cash even though they have credits on their books. “This amendment has become a point of worry for most industry players as they may now have to pay SGST liability in cash even in scenarios where prior to this amendment, these could be paid by utilising credits. The reason being the introduction of this new rule of utilisation of IGST credit,” said Abhishek Jain, tax partner at EY India. IGST credits are accumulated by companies that import goods or source them from vendors in other states. Collections under IGST are shared between the central and the state governments. Tax experts said the regulation change could result in litigation.

“The main objective of GST is that there should be no tax cascading, but the underutilized or non-utilised credit would lead to exactly that. The constitutional validity of this tax cascading could be challenged in court,” said Abhishek A Rastogi, a partner at Khaitan & Co.

The only way companies can solve this problem is by altering their supply chain structures. However, this may not be possible for most companies because supply chains cannot be determined merely to save taxes, industry experts said.

With the new regulation requiring utilisation of IGST credits first, industry experts said that many companies with a national presence will have credits accumulated in one state and taxes pending in other states.

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Source: Economic Times
Telcos seek GST waiver on payments to govt, Rs 35K-cr input credit adjustment

Telcos seek GST waiver on payments to govt, Rs 35K-cr input credit adjustment

Telecom firms, barring Reliance Jio, have asked the government to waive GST on spectrum payments and other levies, while adjusting accumulated tax credits of Rs 35,000 crore in the pending payments.

In a letter to Telecom Minister Manoj Sinha Monday, the Cellular Operators Association of India (COAI) said value-added tax or goods and services tax (GST) is not applicable to government services internationally, as they are considered ‘out of scope’ or regarded as non-economic activities or sovereign functions that are outside the ambit of tax.

“Therefore, in line with the international practices, it is requested that payment of regulatory levies (licence fees (LF), spectrum usages charges (SUC), and spectrum payments) made by telecom operators should be exempted from tax under GST.

“The same could be achieved by issuing exemption notifications as per provisions stipulated under GST Act,” said COAI Director-General Rajan S Mathews in the letter.

COAI members include Bharti Airtel, Vodafone Idea and Reliance Jio. Mathews, however, said Reliance has a dissenting view in the matter.

He said that according to a report of the Telecom Regulatory Authority of India, the industry’s revenue reduced 32 per cent between April-June 2016 and April-June 2018, and it is expected that the revenue in 2018-19 will be lower than that of the revenue in 2013-14 at Rs 1.45 lakh crore.

“Since the industry’s revenues have declined substantially, the output GST on revenue is unable to absorb input GST credits available. Such a situation has led to blocking of approximately Rs 35,000 crore of operator’s capital in the form of excess GST credits,” Mathews said.

Telecom operators adjust input credit in GST that they collect from customers.

Mathews said levy of GST on a reverse-charge basis on both spectrum payout and LF, and SUC-related payments are leading to a cascading cash-flow impact requiring payment of GST, which cannot be set off against a corresponding GST liability.

“We request the government to facilitate greater utilisation of the accumulated GST input tax credit of telecom service providers as it will be of a big relief to the ailing industry… utilise the excess GST credit as payment towards the Telecom operators’ liability towards spectrum auction and licence fees/SUC,” Mathews said.

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Source: Money Control
Companies may have to show ledgers for claiming GST credit of over Rs 25 lakh

Companies may have to show ledgers for claiming GST credit of over Rs 25 lakh

Companies that availed of more than Rs 25 lakh credit under the goods and services tax (GST) regime in lieu of levies paid under the previous system will soon have to give details of their purchase ledgers for six months before the new tax regime was rolled out.

The government will soon bring out a new ‘credit growth return’ form. This comes after a detailed analysis of the top 50,000 taxpayers showed a sharp rise in the closing balance of credit of many at the end of June last year compared with September 30, 2016. These top 50,000 taxpayers have claimed about Rs 1.5 lakh crore worth of credit.
GST was rolled out on July 1 last year. “The form would be notified soon,” a government official with knowledge of the development told ET.

Companies that have shown more than a 25% jump in credit between October 2016 and June 2017 will also have to share these details. This form will be restricted to central GST as states captured purchase details under the value added tax (VAT) regime.

The move implies that tax authorities are looking to turn up the heat as GST collections remain far from buoyant. There is a worry that companies may have claimed more credit than they were entitled to, leading to suppressed GST revenue.

Most states, barring six, have suffered a revenue shortfall and will have to be compensated by the Centre. GST collections in August stood at Rs 93,960 crore, less than Rs 96,483 crore in July.

The deadline for availing past credit expired on September 30. GST replaced multiples state and central taxes such as excise duty, service tax, countervailing duty, value added tax, purchase tax, and octroi. The government had in December last year issued a warning to industry to amend any inflated returns filed for credit in lieu of taxes paid prior to the rollout of GST.

Under the transition rules, traders and retailers are allowed to claim a credit of 60% of taxes paid earlier against CGST or SGST dues where the tax rate exceeded 18%. In cases where the GST rate was below 18%, only 40% deemed credit was allowed against CGST and SGST dues.

The government also allowed refund of 100% excise duty on goods that cost aboveRs 25,000 and bore the brand name of the manufacturer along with a serial number such as televisions, refrigerators or car chassis. Tax experts say instead of prescribing another form, tax authorities should rely on data captured under the VAT regime.The government can surely verify the purchase details with respect of opening credit claimed by businesses as on July 1, 2017, and there might be some genuine concerns around possible excess credit claimed in specific cases.

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Source: economictimes.indiatimes
160 companies to get notices on transitional GST credits

160 companies to get notices on transitional GST credits

Transitional GST credits

Several Indian companies, including some large entities, may start receiving notices from Monday on transitional tax credits in the run-up to the introduction of the single producer levy, two people with direct knowledge of the developments told ET.

The notices from the indirect-tax department follow last week’s direction from the Central Board of Excise and Customs (CBEC) that asked chief commissioners to verify all transitional credit claims beyond Rs 1 crore. About 160 companies, which collectively have claimed about Rs 65,000 crore in transitional tax credits, would be issued notices in the coming weeks.

“By Friday, chief commissioners had received the names of companies in their jurisdictions and asked for a basic report on the subject. Notices would be issued to companies and explanations would be sought for the amounts claimed in transitional credits,” said a person in the know.

In some cases, the indirect-tax department is also asking companies – particularly some Hyderabad-based infrastructure establishments — to produce the VAT returns of the past one year.
companies under GST Scanner

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The government is seeking these details to cross-check the transitional credit in GST. Transitional credits are basically tax credits accumulated before July 1 on pre-GST stock. According to the GST law, the credit can be set off against GST liability. Taxmen suspect that some companies are misusing the provision and have filed fake returns.

“The suspicion is that many companies have claimed credit when they do not have proper invoices to support them. Ideally, when this happens, companies could only claim 60% of transitional credit, but some companies seem to have taken 100% credits,” said a tax officer. Industry trackers say that this step by the government has spooked several companies.

“Large companies, with huge inventories, longer cycle time, and substantial monthly tax payments may rightfully have claimed significantly high transition credit,” said MS Mani, partner, Deloitte India. “Hence, all large claims should be evaluated after considering the size of the operations and attendant circumstances. There is an urgent need to define some processes based on which the transition credits are scrutinized, so that credits are not denied on frivolous grounds and unnecessary litigation is avoided.”

Individual companies under the lens could not be ascertained, but the tax officer quoted above said: “Most of these companies being scrutinised are major vendors of some of the biggest Indian companies. In most cases, the companies still have time to rectify their mistakes,” he said.

Some industry trackers say that Rs 65,000 crore as transitional credit in the total GST revenue of Rs 95,000 crore for July appears disproportionate.

“The amount of opening credit does look to be on the higher side, particularly because many companies have not yet filed the TRAN 1. In some cases, companies may have made genuine errors in credits. Many of these companies may revise in the coming weeks,” said Pratik Jain, Partner, National Leader – Indirect Tax – PwC India.

Experts said those scrutinising credits now time may be doing so prematurely as several companies are yet to file GST due to the extended deadline. “The deadline for filing Trans 1form is extended to October 3 and so the department will get final data only then,” said Sachin Menon, national head of indirect tax at KPMG.

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Source: ET


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