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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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GST rate cut to boost demand may be counterproductive, say finance ministry officials

GST rate cut to boost demand may be counterproductive, say finance ministry officials

The government may not accept the industry’s demand to substantially reduce Goods and Services Taxes (GST) for six months to boost demand as the exemption would block input-tax credit that would have an adverse impact on businesses and may not result into any significant gain to the consumer, two finance ministry officials said.

The GST exemption will make output tax as zero and thus the input-tax credit would be blocked, which will be added to the cost making the product costlier, the officials with direct knowledge of the matter said requesting anonymity.

“This will not only be injurious to the industry but also to the consumer at large and this is certainly not going to revive the demand,” one of the officials said.

The GST is an integrated levy of indirect taxes and a main source of revenue for both the Centre and the states. It is about one-third of the total tax receipts. Over 70% of the GST revenue accrues to the states through their own share and the devolution. Therefore, it is impossible for states to manage their finances without the GST revenue, a second official said.

Several industry associations have said demand generation would be a major challenge before the government after the lockdown is lifted and a substantial reduction in GST rates could be a solution. Niranjan Hiranandani, president, Associated Chambers of Commerce and Industry of India (Assocham) is one of its proponents who had proposed to cut GST rates on almost all products by 50% for six months to boost demand and had asked the government to include it in the part of its economic stimulus package with estimated cost of about Rs 3 lakh crore. HT reported it on April 17.

Responding to the finance ministry officials’ comments, Hiranandani said on Tuesday, “In theory, yes – lost input tax credit (ITC) on exemption from GST is an issue of concern, but that is not what the industry’s suggestion.”

“It has to be viewed from the perspective of incentivizing consumers by inducing them to make a purchase leading to the consumption which is the need of an hour. The argument is that a cut in GST for a short term, say next 6 months, will reduce the amount paid for the good or service, so the consumer will buy more (spend more) and thereby, revitalize the economy. It is a simple issue of reducing (not exempting) GST, so that consumers go ahead and buy – in the present, during the period of reduced GST rather than keep waiting for some other day to do so,” he said.

The logic is that demand generation needs reduction in GST,” he said adding “The aspect of ITC can be dealt with, so long as the suggestion is taken in the proper perspective.”

Experts, however, advised the government to adopt a cautious approach while tempering with GST rates. “There does not appear to be any empirical evidence that any country has exempted GST/VAT [value-added tax] across the board in order to drive up the pandemic-impacted economies. There could be specific sectors/areas where there may be a need to rationalise the GST rates for a temporary period to assist the sector. This needs be done very cautiously ensuring that revenue losses are minimised, leakages are avoided and the reductions do not lead to emergence of inverted duty structure situations,” said MS Mani, partner at Deloitte India.

Abhishek Jain, tax partner at consultancy firm EY said a GST exemption would entail breaking of credit chain, higher input tax costs for businesses and complexities on compliances with credit transitions during taxable and exempt tax periods. “A specified percentage GST rate reduction could be explored vis-à-vis a NIL rate/exemption by the government specifically for the severely impacted sectors. In a scenario, where the said rate reduction entails accumulation of credits, the government should ensure full refund of the credits so accumulated with faster processing of such refunds,” he said.

According to Pratik Jain, partner and leader-Indirect Tax at  India, providing GST exemption leads to complications in terms of blockage of ITC, coupled with rigors of anti profiteering provisions, besides imports become cheaper. “However, there is perhaps a need to make an exception for certain industry sectors such as airlines, hospitality etc. In addition, the government should consider providing working capital cushion to industry by deferring the payment of GST collected by few months to industry at large, without payment of any interest,” he said.

Source: Hindustan Times

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CBIC enables Form PMT-09 for Shifting Wrongly Paid Input Tax Credit

CBIC enables Form PMT-09 for Shifting Wrongly Paid Input Tax Credit

The Central Board of Indirect Taxes and Customs ( CBIC ) has enabled the Form PMT-09 for shifting the wrongly paid the Input Tax Credit ( ITC ).

The CBIC has recently introduced Form PMT-09 (i.e. a challan) for shifting wrongly paid Input Tax Credit. This enables a registered taxpayer to transfer any amount of tax, interest, penalty, etc. that is available in the electronic cash ledger, to the appropriate tax or cess head under IGST, CGST and SGST in the electronic cash ledger.

Hence, if a taxpayer has wrongly paid CGST instead of SGST, he can now rectify the same using Form PMT-09 by reallocating the amount from the CGST head to the SGST head.

All taxpayers registered under GST are eligible to shift any balances available in the electronic cash ledger using Form GST PMT-09. The option is available after the taxpayer logs in, under the electronic cash ledger tab. Thus, a taxpayer can now easily rectify wrongly paid taxes or other amounts.

Source: TaxScan

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Govt not cutting GST on PPEs, masks, to save local cos from cheap imports

Govt not cutting GST on PPEs, masks, to save local cos from cheap imports

The government is holding back on any GST rate reduction for items like PPE, ventilators, test kits, and sanitisers, as this could end up encouraging ‘sub-standard imports’ from China.

Government sources clarified on this after Congress leader Rahul Gandhi raised the issue on Twitter, arguing that it was wrong to levy GST on such items from people who were dealing with poverty and disease.

On the contrary, sources said, GST exemption would make prices fall leading to hardships and distortion for domestic manufacturers without much cost-benefit to the consumers. They said such a step would ensure imports get an advantage on domestic supplies, especially in PPE where the hardship on account of GST exemption would be “severe” for domestic units as basic customs duty on the item is nil up to September 30, 2020.

“The recent experience shows that sub-standard quality goods are exported by China to India and the world. Therefore, incentivising imports by the reduction of GST, at the cost of domestic units, may not be a desirable option,” a government source said.

Sources also explained that distorting the rate structure at the cost of domestic supplier may not be desirable in a situation where government is the biggest buyer of these goods and is supplying these goods for free. “The GST on said items is mostly borne by the Governments. Domestic units are making serious efforts to ramp up their capacities. In certain cases, like masks and sanitisers, the items are being procured by individuals too. Putting domestic manufacturers at disadvantage viz a viz imports may not be desirable,” the sources said.

It was further explained that GST exemption leads to a blocked input tax credit (ITC) thus increasing the cost of manufacturing for domestic manufacturers. “Even if GST on PPE is reduced to nil, the total cost would remain unchanged. While GST exemption to PPE would make output GST as zero, the ITC (GST suffered on inputs) would get blocked and would get added to the cost. Therefore, while the consumer does not gain from GST exemption, the compliance burden would increase for the manufacturer,” sources said. They added that imports would not suffer any such block ITC and thus, imports get an advantage. Sources said GST exemption on sanitary pads had led to a similar situation for domestic manufacturers of the product.

The government had exempted basic customs duty and health cess on such items, except sanitisers till September 30 given the immediate need for such items from abroad. “But GST exemption on such items is in a different footing and has significant cons without much gains to the consumer,” sources added.

Source: Economic-Times

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Covid-19: Govt extends e-way bill validity, defers restricted ITC under GST

Covid-19: Govt extends e-way bill validity, defers restricted ITC under GST

The government on Friday extended the validity of e-way bills and deferred the application of restricted 10 per cent input tax credit under goods and services tax (GST) giving relief to the industry dealing with supply and cash flow issues amid the coronavirus (Covid-19) induced lockdown.

The validity of e-way bills that were set to expire between March 20 and April 15, has been extended till April 30 to help companies facing supply-related issues with orders stuck in transit in most cases.

“Where an e-way bill has been generated and its period of validity expires during the period 20th day of March, 2020 to 15th day of April, 2020, the validity period of such e-way bill shall be deemed to have been extended till the 30th day of April, 2020,” the finance ministry said in a notification issued late evening on Friday.

Under the GST regime, e-way bill has to be generated if goods worth over Rs 50,000 are transported. An e-way bill is valid for up to 24 hours for a distance of 100 km, depending on the size of the vehicle. However, if the vehicle does not cover 100 km within 24 hours, another bill has to be generated. For every 100 km travelled, the bill is valid for one additional day.

The central board of indirect taxes and customs (CBIC) also deferred the application of 10 per cent restriction for availing input tax credit for February, to August, and rolling over the cumulative applicability to the month of September this year. The seven-month window will ease industry’s working capital and cash flow.

In order to plug evasion, the GST Council in had in December restricted input tax credit to 10 per cent of the eligible amount for an entity if its supplier has not uploaded relevant invoices detailing the payments made. It was tightened from 20 per cent introduced in October.

The GST collections fell below the Rs 1-trillion mark in March after a gap of four months, although disruption caused due to coronavirus-induced lockdown will only get captured in the subsequent months.

Source: Business-Standard

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GST: Government Clarifies On Utilisation Of Tax Credit For M&A

GST: Government Clarifies On Utilisation Of Tax Credit For M&A

Entities undergoing business reorganisation via merger, demerger, amalgamation, change in ownership and transfer of assets have now been given clarity on utilisation of input tax credit.

Input tax credit is the tax paid on inputs. Businesses get a credit for this to deduct from the tax on the output so as to avoid double taxation and pay tax only on the value added.

Apportionment of input tax credit must be on the basis of state-wise assets in demerger schemes, the government has clarified.

Section 18 of the Central Goods and Services Tax Act allows transfer or apportionment of accumulated and unutilised input tax credit between entities undergoing business reorganizations. While the Act lays down the method, it is silent on certain practical aspects of such transfer. The circular aims to clarify on such issues.

Demergers: Apportionment of Tax Credit

The CGST Rules say tax credit can be transferred or apportioned to a demerged entity based on the ratio of value of transferred assets. However, the rules do not specify whether the value of the assets must be considered on a state-wise or countrywide basis.

It’s now been clarified that tax credit must be apportioned to the demerged entity on the basis of state-wise value of assets. That’s because GST requires state-wise registration of business entities.

Experts welcomed the clarification. The circular merely clarifies the position which the industry has been following at a practical level, Rajat Bose, partner in Shardul Amarchand Mangaldas & Co., said.

The clarification rightly recognises the distinct person concept under GST and clarifies prevailing doubts, especially for those businesses who have pan-India operations, Deloitte’s senior director Saloni Roy said. “An in-depth state-wise calculation will require extensive planning.”

The circular, however, misses out on certain critical aspects, Bose pointed out.
Some practical aspects still need clarity—for instance, eligibility to claim input credit by the transferor company on services used for business re-organization. A registered business may utilise legal, consulting and accounting services for transfer of business during business reorganizations. The GST department may not treat them as business expenses as it may not consider them to be as sale of “goods”. Any input tax credit availed for such expenses may be disallowed by the department, Bose pointed out.

Similarly, another area that needs clarity is treatment of common input services like lease or rental expenses. Bose explained this by way of an illustration.
Company ‘X’ with a turnover of Rs 1,000 crore hives off one of its units to Y for Rs 200 crore. This Rs 200 crore will be considered an exempt supply and no GST on it will be applicable. Any expense—rentals, electricity—that X may have incurred towards this unit, it would’ve availed tax credit for it. Once the unit is sold, the department could take a position that since Rs 200 crore is an exempt supply, tax credit availed for this unit needs to be reversed as well.
The treatment of such input tax credit in hands of X requires clarification, Bose explained.

Besides demergers, the clarification will be applicable to other forms of business restructurings, Roy pointed out.

Electronic filing for transfer of such input tax credit must be done only in states where the transferor and transferee companies are registered, the notification has clarified.

Source: bloomberg quint

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GST Evasion: Racket busted of Large number of Non-Operational Partnership Firms falsely claiming refunds against accumulated ITC

GST Evasion: Racket busted of Large number of Non-Operational Partnership Firms falsely claiming refunds against accumulated ITC

A large number of proprietorship/partnership firms registered with Gautam Buddha Nagar and other Commissionerates of Delhi NCR which were apparently connected and had claimed a huge amount of refunds against accumulated Input Tax Credit (ITC) on account of inverted tax structure and Zero-rated supply of Goods were identified.  Searches were conducted on 13.3.2020 by officers of CGST GautamBudha Nagar along with other Commissionerates at various places declared as principal places of business and residential premises located in Delhi, Faridabad, Gurgaon, Noida, and Greater Noida.

During the search, none of the firms were found to be existing/ operational at their declared premises. Further investigations revealed that two persons, apparently mastermind behind the racket, had obtained KYC documents from proprietors/ partners of these firms for consideration. All the business activities were found to be only on paper without actual movement/ supply of goods which included manufactured/unmanufactured tobacco, yarn, woven fabric & cotton yarn, other made up clothing, etc. These firms had generated invoices for passing on Input Tax Credit(ITC) ascertained to be Rs 1892 crore so far. The refund claims amounting to Rs 264 crore have been paid to these firms, out of whichRs.60 crore have been recovered so far. In addition, pending refund claims of approximately Rs 131 crore have been withheld.

Residential premises of suspected masterminds were also searched on 15.03.2020 and their statements recorded. Based on their confessional statements, they have been arrested on 16.03.2020 under Section 69 of the CGST Act.

Source: TaxScan.

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GST: Input tax credit frauds rise 170% in just nine months of FY20

GST: Input tax credit frauds rise 170% in just nine months of FY20

The number of input tax credit (ITC) fraud cases under Goods & Services Tax (GST) in the first nine months of this financial year has risen 170 per cent more than that reported in the whole of last fiscal. During the same period, the amount involved is nearly 80 per cent of full FY19.

According to a Parliamentary Committee report, tabled on Thursday, the number of ITC fraud cases, based on fake invoices during April-December of this fiscal, surged to 5,986. This number was 2,211 in the 12 months of 2018-19. In terms of amount involved, the first nine months of this fiscal recorded over ₹13,000 crore while recovery was nearly ₹550 crore. During 2018-19, the total quantum was nearly ₹10,400 crore, while recovery was a little over ₹800 crore.

GST cases booked

During the first 10 months (April-January) of the current fiscal, the number of cases was 8,335 with nearly ₹30,000 crore involved and the total recovery was nearly ₹15,000 crore. During fiscal 2018-19, the number of cases booked was over 7,300, amount involved about ₹38,000 crore and recovery nearly ₹19,000 crore.

The Committee noted that system-based analytical tools and intelligence of the Directorate General of Analytics and Risk Management are being used to curb evasion in GST. It is to be noted that intensive anti-evasion efforts are being taken, particularly with respect to ITC frauds based on fake invoices.

However, the Committee observed that the monthly revenue collections from the GST are yet to stabilise. States have been reporting losses in collection, which will only increase the compensation burden of the Centre. During the current fiscal, the total target for collection of GST compensation cess is a little over ₹1.09-lakh crore, while the net collection during April-December was over ₹70,000 crore. However, GST compensation, released as per budget provision, and the actual requirement of States for the April-September period has exceeded ₹81,000 crore.

Resolution of grievances

To keep the States in sound financial health, the Committee has called for resolution of grievances by the GST Council. The panel expects the Centre to sort out the festering issues pertaining to GST at the earliest. The Committee would also urge the Finance Ministry to extend the due date for filing GST returns to 25th of every month.

Now, all eyes are on the next GST Council meeting scheduled for March 14. States are likely to raise the issue of compensation cess and discuss ways to resolve issues related to the inverted duty structure (when indirect taxes on raw material are higher while on finished products lower), which results in outflow as refund. The estimated refund on account of the inverted rate structure is about ₹20,000 crore a year.

Source: The-Hindu-Business-Line

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GST rates may rise on mobiles, footwear

GST rates may rise on mobiles, footwear

Ahead of the Goods and Services Tax (GST) Council meeting on Saturday, the government is pushing for a review of the levy on mobile phones, footwear, fertiliser and man-made fibres to correct a major discrepancy that has crept in where the duty on the finished product is lower than those on inputs.
The “inverted duty structure” is resulting in massive refund claims on tax paid on inputs, although the government does not allow credit for levies on input services and capital goods, making the tax regime inefficient. Estimated annual refund on account of inverted rate structure was estimated at around Rs 20,000 crore.

At least four items — mobile phones, footwear, manmade fabrics and fertiliser — have been identified for a possible change in levies, which may rise in a phased manner. The move is part of a review of the wider duty structure where several items such as utensils and renewable energy equipment were also flagged, although their volume is much lower.

The proposals have been discussed by a committee of officers on augmentation of revenue, which was also on the agenda for the last GST Council meeting. Sources said that there is little justification in retaining a 12% levy on mobile phones when many electronic items such as TV, water heaters and mixers are taxed at a higher rate. Besides, before the launch of GST, the levy was higher.

The issue is a little complex in case of fertilisers as the government will have to increase the subsidy to correct the inverted rate structure to ensure that farmers are not impacted. But officials reckon that a corrected GST rate structure would go a long way in refining the indirect tax system. Against taxes of around 9.75% before GST, the government had put fertilisers in the 12% bracket. But states got the GST Council to reduce the levy to 5%, creating a situation where Rs 6,000 crore have been claimed as input tax credit refund on fertilisers.

For man-made fibres, the textiles ministry has made a strong pitch for correcting the duty structure, arguing that differential rates and slow-refunds of accumulated input tax credit have affected the competitiveness of the industry and hit investment. The ministry has demanded that man-made fibres and yarns need to be brought under a uniform tax slab as it will benefit the spinning and power loom sectors.

Source: Economic-Times

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NAA directs GST Commissioners to ensure Profiteering Amount is passed to all eligible buyers of Flats

NAA directs GST Commissioners to ensure Profiteering Amount is passed to all eligible buyers of Flats

The National Anti-Profiteering Authority (NAPA) directed the Central Goods and Service Tax (CGST) or State Goods and Service Tax (SGST) Commissioners to ensure the profiteering amount is passed to all the eligible buyers of the flats. And submit a report of compliance within 4 months from the date of receipt of the order.

In the case of Abhishek Singh & Director General of Anti-Profiteering vs. M/s. Aparna Constructions and Estates Pvt. Ltd., it was observed that the respondent company denied the benefit of Input Tax Credit (ITC) to the buyers of the flat, which is the contravention of Section 171(1) of the Central Goods and Service

Tax (CGST) Act, 2017. Consequently, the respondent is liable for the penalty for the contravention of Section 171(1) CGST Act, 2017.

The respondent, in this case, is M/s. Aparna Constructions and Estates Pvt. Ltd. was a builder and it undertook the project namely ‘Aparna Serene Park’ wherein one of the flats was purchased by the Applicant. The applicant was denied the benefit of Input Tax Credit (ITC) by the company, by the way of commensurate the reduction in the price of the flat purchased by the applicant.

The issue raised in this case was whether the applicant was eligible to avail of the benefit of Input Tax Credit (ITC) or not?

The National Anti-Profiteering Authority (NAPA) comprising of the Chairman, B.N. Sharma and the Technical Members, J.C. Chauhan and Amand Shah observed that the respondent company denied the benefit of Input Tax Credit (ITC) to the buyers of the flat, which is the contravention of Section 171(1) of the Central Goods and Service Tax (CGST) Act, 2017. Consequently, the respondent is liable for the penalty for the contravention of Section 171(1) CGST Act, 2017.

The Authority further directed the Central Goods and Service Tax (CGST) or State Goods and Service Tax (SGST) Commissioners to ensure the profiteering amount is passed to all the eligible buyers of the flats. The commissioner was asked to submit a report of compliance within 4 months from the date of receipt of the order.

Source: TaxScan.

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