Input Tax Credit

Key Facts

Restrictions imposed on the input tax credit, used by business establishments to reduce their tax liability,

on inward supplies under the Central Goods and Services Tax Act have been challenged in the Rajasthan High Court with the plea that the amendment made to a rule to introduce the provision had imposed “unreasonable and arbitrary” conditions.

What’s the issue?

The amended Rule 36 (4) of the CGST Rules, 2017, provides that the input tax credit can be availed only when a supplier of goods updates and uploads online the details of supplies through each of the bills. The petition now contended that the right to avail of credit could not be taken away by imposing the restrictions contained in the provisions of Section 43A of the Act, which was yet to be notified, through rules.

What is the Input Tax Credit (ITC)?

• It is the tax that a business pays on a purchase and that it can use to reduce its tax liability when it makes a sale.
• In simple terms, input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount.
• Exceptions: A business under composition scheme cannot avail of an input tax credit. ITC cannot be claimed for personal use or for exempt goods.

Concerns over its misuse:

• There could be the possibility of misuse of the provision by unscrupulous businesses by generating fake invoices just to claim the tax credit.
• As much as 80% of the total GST liability is being settled by ITC and only 20% is deposited as cash.
• Under the present dispensation, there is no provision for real-time matching of ITC claims with the taxes already paid by suppliers of inputs.
• The matching is done based on system generated GSTR-2A after the credit has been claimed. Based on the mismatch highlighted by GSTR-2A and ITC claims, the revenue department sends notices to businesses.
• Currently, there is a time gap between ITC claims and matching them with the taxes paid by suppliers. Hence there is a possibility of ITC being claimed based on fake invoices.

Need of the hour- real-time updates:

To fill the gap, a new return filing system has been proposed. Once it becomes operational, it would become possible for the department to match the ITC claims and taxes paid on a real-time basis. The revenue department would then analyze the large number of ITC claims to find out if they are genuine or based on fake invoices and take corrective action.

Source: The Hindu