Many businesses have begun gasping for working capital with tax officials chasing tough targets and making it hard for them to make use of tax credits.
Several businesses have found that taxmen neither allow them to set off taxes on finished products against credit for taxes paid for various services in making them, nor refund the tax paid. While denying claims, field officers under pressure to meet targets often point to the tax rate on the final product, which is lower than the tax rate on inputs, though, according to industry watchers, there is no such restriction in the goods and services tax (GST) law.
The revenue department has set a target of ₹1.15 trillion, each, for January and February, and ₹1.25 trillion for March, against the monthly average of ₹1 trillion so far in FY20. According to an industry executive, who spoke on condition of anonymity, the target for officials refers to tax revenue collected in cash, which incentivises them to discourage businesses from using tax credits for discharging their final tax liability.
According to an online apparel retailer, accumulated tax credits from services used, which are not refunded has led to working capital needs spiralling out of control and investors threatening to withdraw support.
The retailer said on condition of anonymity that since all the services utilised to sell the final product—such as marketing, warehouse rentals and logistics—attract an 18% GST rate while the final product is taxed at 5%, the company’s survival is in question. “We request the GST Council to facilitate a refund mechanism for business cases like ours where cashflows are completely choked causing huge hardship to the business," he said.
Authorities, who are not in a position to raise GST rates for higher revenue during an economic slowdown, are now dealing with tax credit claims strictly. They have also launched a crackdown on fake invoicing and bogus transactions. This is in sharp contrast to the handholding in the initial two years of GST meant to help businesses make a smooth transition. In some cases, officials are cautioning companies about doing business with vendors with questionable track record on compliance, forcing large companies to police small players.
According to Abhishek Jain, Tax Partner, EY, the new restriction on availing of input tax credits to 20% in cases where the supplier has not disclosed invoices, which was further lowered to 10%, has increased cash flow requirements. “With timely reconciliation and a more streamlined process of vendor management including timely follow-ups in cases of non-compliance, payment management of non-compliant vendors and other similar measures could help address or minimize the additional working capital impact on account of the above compliance," said Jain.
Tax experts also said ensuring a smooth flow of tax credits was essential to the proper working of GST. “It is essential to permit seamless input tax credits (ITC) for businesses with minimal restrictions as GST is expected to work as an unimpeded value added tax. Any impediment in the flow of ITC would increase the working capital requirements of businesses and hence should be avoided," said M.S. Mani, tax partner at Deloitte India.