Business fears hit to cash flow from new GST input tax credit restriction.

Business fears hit to cash flow from new GST input tax restriction

Industry fears that the Goods and Services Tax (GST) Council’s decision to further restrict input tax credit (ITC) on invoices not uploaded in the relevant form would block the cash flow of businesses, says the latter, at a time when they’re struggling on finances due to economic slowdown.

On Wednesday, the Council approved a proposal to restrict ITC to 10 percent of eligible credit, against the current 20 percent, for such invoices.

The mechanism works this way: Suppose you paid Rs 1,000 as taxes to your suppliers and claimed this as ITC on your summary input-output form, GSTR 3B. You have to also ensure all your suppliers upload these invoices in their supply-side return, GSTR 2A. Now, if invoices amounting to 20 percent of the ITC claimed are not so uploaded by your vendors, then your eligible credit would be only Rs 800. You can claim further ITC of Rs 80 (10 percent of Rs 800) after the GST Council’s decision is notified. Earlier, you could have done so for Rs 160.

In fact, before October, whatever was claimed as ITC in GSTR 3B, was being released by the authorities. In October, the government restricted this to 20 percent of eligible credit. And, now, to 10 percent.

Rule 36 (4) under the Central GST Act, which enables such restrictions, is already under challenge at the Delhi high court.

"Businesses would welcome the elimination of such restrictions which are not in consonance with key GST principles which mandate seamless credits across the value chain," said Mani.

Harpreet Singh, partner at consultancy KPMG. He says many multinational companies have completely forgone the 20 percent or 10 percent credit, on account of the hassle of month-on-month reconciling of credit. Abhishek Jain, the tax partner at consultancy EY, says the new restrictions are due to falling tax collections and to plug fraudulent credits.

"It is imperative for businesses to ensure timely credit reconciliation, including follow-up with vendors, timely correction and maintaining adequate date for the said compliance. Wherever proper reconciliations are not done, it may lead to cash flow issues,” he said.