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CMA Bhogavalli Mallikarjuna Gupta
In the current tax
architecture of India, Input Tax Credit i.e CENVAT Credit in case of purchase
of manufactured goods and VAT credit in case of purchase of goods within in the
same state is available based on the sales invoice issued by the selling dealer.
The buyer on receipt of the goods will avail the input tax credit and adjusts /
offsets it against the output tax liability. This process is simple for the
business houses as credit is available immediately and saves the cash flows.
Now let’s look from a taxman’s perspective. 1. The selling dealer pays the
tax in the subsequent month and the tax collection / revenue increases. The
buying dealer avails the credit, no impact on the tax collection as the amount
got collected is utilized by the buyer in the same month or subsequent months.
2. The selling dealer
does not pay the tax and the buying dealer avails the credit, in this process,
there is revenue loss to the government.
In the second case, the government is not
receiving any income but the buyer is availing credit, that means there is
revenue loss and from a taxman’s parlance it is also known as revenue leakage.
This happens due to some black sheep in the system and it also increase the
menace of black money in the economy as the payment from the buyer goes
unaccounted.
To plug this, it is being proposed to rate the
dealers similar to CIBIL which evaluates the individuals for their
creditworthiness. CIBIL report is followed by the banks before disbursing loans
to the individuals. If the CIBIL score is good, the individual is disbursed
with loan or rejected or disbursed if any discrepancies are cleared.
To avoid the revenue leakage, it is being
proposed in GST that input tax credit will be available only when the seller
pays the tax liability. The input tax credit is now under the control of
the seller and the GSTN and no longer in the hands of the buyer. This is
paradigm shift from the current process of availing the credit immediately on
receipt of goods in case of Central Excise or receipt of invoice in case or
service tax. The buying dealer is eligible for the input tax credit only when
he selling dealer pays the tax liability.
Now the question arises, how will the buyer
know if the seller is prompt in his tax payments? The government intends
to send alerts on all the defaulting dealers though SMS with all his registered
buyers and also make this information public. This process is called
blacklisting of dealers. The blacklisting of dealers is not only based on this
condition but also on other conditions
1. Continuous default
for 3 months in paying ITC that has been reversed.
2. Continuous default
of 3 months or any 3 month-period over duration of 12 months in uploading sales
details leading to reversal of ITC for others. Defaulters of even a single event
should also be flagged and put in public domain as being a potential black
listed dealer so as to alert the buyers.
3. Continuous short
reporting of sales beyond a prescribed limit of 5% (of total sales) for a
period of 6 months.
Business Implications
Does purchases from a blacklisted dealer has
business implications? The answer is “YES”.
Increase in the cost of production – if the seller does not remit the tax, it
means the buying dealer cannot avail input tax credit, that means, the tax has
to be treated as an expense based on the prevailing accounting standards. The
moment it is taken as an expense tax, the cost of production will increase and
thereby hitting the bottom line of the company.
Increase in the working capital limits
– if the input tax credit
it not available to the buying dealer, it is a double edge sword. As input tax
credit is blocked for the said purchases, the output tax liability has to be
paid from through cash that means there will be impact on the cash flows and
there by impacting the working capital. Again more working capital means more
financial costs, more financial costs means impact on the bottom-line of the
organizations. It is expected that based on the nature of the industry there
will be an average increase of 10% to 20% of the working capital. The business
houses have to work on the modalities to meet the same either by applying for
increased limits or fund through the same through internal accruals or by other
means.
Complexity in handling the external
reporting – the proposed laws
under GST are not stringent, the input tax credit is available once the selling
dealer remits the taxes. The complexity arises now, if the purchases are done
in the month of February 2016 and the selling dealer remits the tax in May 2016.
How do we handle this in the financial reporting as in India the financial year
is 1st April to 31st March. As the credit is
related to prior period item, do we need to make necessary changes to the
reported financial statements? The other challenge is if the input tax is
treated as recoverable, and the dealer does not pay and there is change of
financial year, how to report the recoverable tax as expenses?
Cost sheets have to be submitted and if there
is change post submission how to handle the same? These concerns have to be
raised by the organizations directly or through trade bodies to make
representation to the government.
Why blacklisting is being proposed
1. Only for regulating
ITC by others.
2. Will be based on
dealer rating. A dealer will be blacklisted if dealer rating falls below the
prescribed limit.
3. To be put in public
domain.
4. To be notified
(auto-SMS) to all dealers who have pre-registered this dealer (black listed
now) as their supplier.
5. To be prospective
only (from month next to blacklisting)
6. Blacklisted GSTINs
cannot be uploaded in purchase details. Corresponding denial of ITC to be
supported by suitable provision in the law.
7. ITC reversal in
hands of the buyer should take place for disowning of any tax invoice with date
prior to effect of blacklisting of the seller.
8. Once blacklisting
is lifted, buyers can avail unclaimed ITC subject to this dealer uploading
sales details along with tax and interest.
How avoid getting into the trap?
In the current business process of any organization,
the parameters which the purchasing teams look into while procuring the goods
are
1. Quality of the goods
2. Consistent supply
of the goods
3. Timely delivery
4. Prompt after sales
service if required
5. Cost of the goods
6. Any other specific
parameters based on the need of the hour
Payment of taxes by the seller also has to be
added to the above list, this will ensure that the cost of production does not
go up and also the cash flows which in turn impacts the bottom-line of the
company/organization. This means the purchasing teams should be trained on the
implications of the GST in advance to avoid any unpleasant surprises once GST
is rolled out.
In most of the case the buyer has the upper
hand and he can release the payment to the supplier once he gets confirmation
that the taxes have been paid or reduce the tax amount from the suppliers
payment. If the buyer opts for the second approach, the issue is resolved to
some extent.
Can the new process proposed under GST will
work? Only time has to answer this question……
Any views or opinions represented in this
section are personal and belong solely to the author and do not represent those
of people, institutions or organizations that the owner may or may not be
associated with in professional or personal capacity, unless explicitly stated.
Any views or opinions are not intended to malign any religion, ethnic group,
club, organization, company, or individual.
(Author has written book titled “Roll Up Your
Sleeves for GST, The Impending Tax Reform in India” and can be reached at
mallikarjunagupta@india-gst.in)
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