Government’s Plan To Curb GST Credit Could Squeeze New Firms

The GST Council approved restrictions on availing input tax credit—what businesses get for paying taxes on inputs—by new firms, a government official told BloombergQuint. That may include completely restricting availing of credit or capping the claims, the person said on the condition of anonymity.

An officers’ panel recommended restricting input tax credit on supplies made by new “risky” taxpayers to Rs 20 lakh a month for the first six months of incorporation, the official said. The new risky taxpayers will be those with a new Permanent Account Number and no income tax or business turnover, the official said, adding the government is still considering what the new threshold will be, if at all.

The government is increasingly looking to check GST evasion as poor tax compliance adds to its revenue collection woes amid a broader slowdown in the economy. It achieved the targeted Rs 1 lakh crore monthly GST collection in six out of the first 10 months of 2019-20. Potential curbs on input tax credit are one of the many measures to plug the loss of tax revenue.

While the restrictions should help check tax evasion by fraudulent firms, this could cause substantial hardship for genuine business players, Abhishek Jain, partner at EY India, told BloombergQuint. Before imposing the curbs, he said, the government should ensure the flexibility of passing full input credit to businesses that can substantiate actual eligibility.

The officers’ panel decided the Rs 20-lakh cap as an internal analysis by the government found new taxpayers within the first three months of registration declared a tax of more than Rs 1 crore, and use the input tax credit to adjust their liability, the official quoted earlier said.

In the first three months of the ongoing financial year, more than 700 new GST identification numbers reported a tax liability of over Rs 1 crore. Of these, 450 entities used 99 percent of the tax amount due as an input tax credit, the official said. In the year-ago period, 2,355 new firms showed a tax liability of more than Rs 1 crore in the first three months and used 95-100 percent input credit to pay tax.

Tax experts view it differently.

It’s important to understand that at inception, manufacturing businesses, in particular, would have significant credits on account of the capital expenditure incurred for setting up plant and machinery, Jain of EY said. Such firms, according to him, would typically only have a minuscule tax payable in cash.

Krishan Arora, a partner at Grant Thornton India LLP, too said that the proposed input credit restrictions are likely to cause financial and working capital hardship to new taxpayers considering their initial business investments and gestation period to achieve sales and profitability.

There’s another worry for businesses as capping input tax credit is not the only plan on the table. The officers’ panel also suggested that if new firms want to avail credit more than Rs 20 lakh, they will have to deposit a fifth of that claim as cash with the government. For instance, if a new firm claims Rs 1 crore input credit over the cap, it will have to deposit Rs 20 lakh in cash. The amount, however, would be included in their cash ledger that can be used to pay GST in the future.

After the Rs 20 lakh cap for six months, seeking a cash ledger balance to avail additional credit will further hurt new taxpayers, Grant Thornton’s Arora said. There were no such restrictions in the pre-GST regime, he said, adding that the government is taking such measures because it could not implement automatic invoice matching due to technological glitches.

The tax authorities plan to roll out the mechanism to match invoices of buyers and sellers of goods and services from the next financial year.