The smaller businesses with annual turnover of less than Rs 5 crore are hit by the recent change in Goods and Services Tax (GST) rule, which restricts the amount of input tax credit (ITC) a business can claim. The rule that was amended last month mandates that ITC claims can only be fully availed if all the relevant invoices are uploaded by the suppliers in its GSTR-1 (the returns where all the outwards sales are detailed).
While the rule was tweaked to ensure that ITC frauds can be curbed, it’s silent on the treatment of businesses, typically classified as MSME, which are required to file GSTR-1 only quarterly. This means that firms that procure from these units will only see the supply invoices once in three months and hence won’t be able to claim credit in the next tax payment cycle for the supply.
Experts said that this has created fears among firms engaging many MSME vendors that their working capital requirement may be squeezed. Consequently, MSME suppliers are being shunned.
“MSME law mandates payment within 45 days to MSME vendors, whereas GST law is enforcing deferral of tax credit on procurement made from such vendors who are filing quarterly GST returns. This double jeopardy is forcing the corporate to circumvent all smaller vendors in order to avoid working capital issues,” Rajat Mohan, senior partner at AMRG & Associates said.
According to the new rule, ITC on invoices which are not uploaded by suppliers in their GSTR-1 (which does not reflect GSTR-2A of recipient), can be availed to the extent of 20% of ITC which is reflecting in GSTR-2A of the recipient in respect of other invoices. For example, if a taxpayers claims ITC of Rs 10 lakh but can only show uploaded invoices worth, say, Rs 5 lakh, the firm can claim a maximum credit of Rs 6 lakh (Rs 5 lakh for which invoices uploaded plus 20% of `5 lakh for missing invoices).
When the indirect tax department was queried by a Twitter user on the oversight in the rule regarding quarterly GSTR-1 filer, the department said: “Quarterly filers contribute about 7% of GST whereas 100% credit can be availed if 83.33% of eligible credit is reported in GSTR-2A.”
Abhishek Jain, tax partner at EY, said: “There remains an ambiguity on whether the restriction in relation to unmatched invoices would as well apply for those vendors who have opted for quarterly filing of returns. The Government should soon issue an explicit clarification that the 20% restriction would not applying to vendors with quarterly filing. Another wish of businesses have been on a unique code to identify persons who have opted for such quarterly filings”.