GST@5: Input Tax Credit A 'Wobbly Cricket Ball'

The promise of seamless flow of credit was the biggest lure for India Inc. in the rollout of the Goods and Services Tax regime five years ago. But ask any business today, it’s become their biggest gripe.

For the uninitiated, here’s how Input Tax Credit works—businesses pay a tax on inputs or goods they use in the course or furtherance of business. They get credit for this tax paid. And when they pay tax on the output, the tax already paid can be reduced. The aim is to avoid double taxation and ensure that the tax is paid only on the value added.

To ensure that there are no leakages or loss of revenue for the government, the law has laid down strict conditions for who can claim input tax credit, what can it be claimed for, how to claim it, its reversal and reconciliation, etc.

And every step along the way, there is a possibility of genuine errors or interpretation issues resulting in ITC being blocked and, in turn, cash flow issues.

To improve working capital management, a Deloitte India survey points out that 54% business leaders urged the government to consider allowing conversion of accumulated input tax credit into tradeable scrips, cross-utilisation of CGST credit across states, and use of credit across entities in a group structure.

In the second part of The Fineprint's special series on five years of GST, VS Parthasarathy, vice chairman at Allcargo Logistics, and former group CFO at Mahindra & Mahindra Ltd.; and Rajeev Dimri, head of the tax practice at KPMG India, articulate the challenges in utilisation of input tax credit.

The credit utilisation experience has been like facing a wobbly cricket ball, Parthasarathy said. It's not like the system is broken—it works but we want it to be seamless, he said.

Parthasarathy highlighted the following challenges on the input tax credit front:

• Claiming tax credit based on Form 2A or 2B seems to be the biggest problem.

• Rule 37 of Central GST is not being rationalised. This provision deals with reversal of tax credit if the invoice amount is not paid to the supplier within 180 days.

• Technical glitches on the portal is a big issue. Every time there is a problem with GSTN, the returnee or the customer has to struggle to re-enter, which leads to delays.

Parthasarathy used a sports analogy to make his point.

"When you devise a tax on principles and then say 'I want to fix every possible loophole', what happens is—in cricket terms—it's like saying that 'If I'm the batsman, the ball shouldn't hurt me'. So, I pad up so much that running between the wickets suffers."

An efficient credit system is the soul of GST and therefore, any fragmentation or delays in the ability of businesses to take credit will take us away from the core objective of why GST was implemented, Dimri said.

Architectural issues aside, Dimri said, the law and its implementation is far from ideal. In the last five years, the challenges that businesses have faced include:

• When it came to availing transition credit, the fear that was created at that point in time, the amount of investigation that happened across industry—it wasn't healthy. There are unnecessary disputes in getting refunds, specially for exporters.

• The law is making all sorts of judgements as to what is the business expense for what I can claim credit for. So, if I am providing food to my employees, why are GST authorities making a judgment whether that is a necessary business expenditure or not. The company law doesn’t make the distinction, the income tax law does not make the distinction. So, we have a lot of input credit restraints that are there.

• Third, of course, forget the state taxes, even central taxes that exist, what I have in State A, I cannot utilise that in State B. I think that's beyond what is given by our fundamental federal structure and therefore, input tax credit is an area that still needs a lot of work.

• Finally, the responsibility to ensure vendor compliance is quite onerous. If I, as a tax payer, have paid my amounts and have discharged whatever financial obligation there is, the consequences of my supplier not meeting its obligation should not be my problem. Vendor non-compliance could be on account of actual fraud but anecdotally speaking, that's not even 5% of transactions.

Is the GST primarily introduced for ease of doing business or is it primarily introduced for ease of the government? That question you need to answer because right now, it is principally designed for ease of the government, not for the ease of business, but the promise to businesses was different, Dimri said.