Why Indirect Tax Department is Issuing Notices to Companies?

Tax

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.

What are the Major Shortcomings of GST that Need to be fixed?

Major Shortcomings of GST

Major Shortcomings of GST that Need to be fixed?

While looking at GSTfrom outside it seems that by amalgamating several taxes levied at the central and state government levels, a free movement of the goods would be facilitated by tax escalation. However this is not happening as expected. Due to the system of multiple registrations and several payment requirements, along with the application of IGST on self-supplied goods, GST has emerged to be having major setbacks which is contributing to the failure in its implementation at different levels.

Major drawbacks of GST

Since the implementation of GST, it has been clear to almost everyone that SMEshave suffered the most due to the sudden changes in tax collection as compared to the medium and large business companies. The government has argued that GST can facilitate free movement of goods across different states. However from several data collected after conducting researches it has been found that SMEs sell most of their products within their own state to various traders who then distribute it to other states. Thus on this account, GST again failed to be beneficial to small companies.

According to the law which implements GST, if GST is mentioned in any invoice it has to be deposited in a GST account. It also mentions that GST must be filed before the 20th day of each month. In order to understand lets take an example- if an invoice is raised in the month of June, the GST needs to be deposited in the GST account, and return must be filed before the 20th of July, even if the invoice has not been cleared by the customer. Thus, a person who has billed a customer with 10 lakh in June, he is bound to pay INR 1.8 lakhs as GST in order to file the return. If they fail to pay this amount, a penalty of 18% per annum is levied on the individual. This system of tax payment is a huge stress to SMEs, since they have to use their own sources to deposit the GST payment for all of their invoices including the ones whose payment has yet not been cleared by the customers.

SMEs’ Next Big Hurdle for SMEs for GST Returns tax chain system

The next big issue that SMEs face is the chain system of tax returns. In order to ensure that after submitting GST returns, an SME needs to make sure that their vendor files GST returns on time. If the vendor does not file tax returns, then it becomes impossible for the SME to claim back the amount which has been paid to the vendor. This chain system has emerged as an extremely complicated method, since it penalises even the individuals who want to comply with all legal norms due to the carelessness of other vendors in the chain.

Advantages of GST Implementation

To sum it all, it can be said that although GST implementation has several advantages, it is slowly killing SMEs. Thus it is the need of the hour to address the growing concerns of SMEs to ensure that the small business owners can retain their business.