The Indirect Tax Department of India has issued several notices to hundreds of companies who claimed that late input tax credits under the GST framework. However, to understand this issue, it is important to first know the system of input tax credit and the way it works along with the criteria that need to be fulfilled before claiming it.
Input tax credit system
Input tax credit system or ITC is a system of tax payment where business companies can claim credit on the extent of tax paid on each purchase in order to reduce their overall tax liability.
How does ITC work?
The method by which ITC works can be understood by the help of an example. If the MRP of a product is INR 1000, and the rate of GST is 18%, then the consumer has to pay a total of INR 1180 to the seller. This includes a GST of INR 180. Without the use of ITC, the seller has to pay that amount of GST to the government. However, by using the system of ITC, the total tax which needs to be paid to the government can be reduced.
Conditions when ITC can be claimed
A business company which claims ITC must meet several requirements for the claim to be acceptable by the tax department.
- The company must have a GST compliant invoice
- The supplier of the company should upload the invoice to GSTN
- The company supplier must have paid the amount of GST to the government
- Returns should be filed
ITC notice to companies
The system of ITC is highly advantageous to business owners. However, the tax department has issued notices to those companies which claimed ITC under the GST framework after they had missed the deadline set by the government. The tax department has asked these companies to reverse their previous transactions and pay interest on the credits. However, this can prove to be disastrous to the taxpayers since they would have to pay increased tax amounts to the government leading to their overall loss.
Tax experts however say that these notices can be challenged in court. Thus, the companies who had filed ITC have only two options left to them. The first is to pay the amount as asked by the tax department and the second is to challenge these notices in court. The tax experts also said that the timeline cannot be considered mandatory for availing credit, since the right is accrued at the time of making the payment and procuring the product.
The companies handed these notices regarding the late filing of ITC are based largely in the States of Maharashtra, New Delhi, West Bengal and Tamil Nadu. Suppose the tax department does not consider their ITC request. In that case, these companies will have to pay a huge amount of money along with interest which can bring down their financial position significantly, affecting the overall economy of the companies and ultimately the states.
