JULY 22, 2016

By G Mani

ON the Draft GST Model Law, I have made an attempt to analyse Input Tax Credit (ITC) provisions.

First of all it is observed that most of the ITC provisions are simply borrowed from existing CENVAT/VAT credit provisions wherever we are facing difficulties & contrary interpretation leading to litigation. Wherever smooth flow is being experienced now the same has been complicated in the proposed GST scenario. There are few benefits to Business and that too due to side effects of combining goods and service. Let us go into the detail.

Sec.16 read with Sec.35&Sec.29 and definitions contained in certain clauses ofSec.2 are relevant on ITC. Clause (9) of Sec.16 provides exclusion categories of ITC. Most of the exclusions are replica of exclusion clause as available now in input service definition Rule 2(l) of CCR and certain conditions of availing credit as provided under Rule 4 of CCR.

It is our experience that the term "personal consumption like catering, insurance, travel benefits extended to employees on vacation such as leave or home travel concession, when such goods/services are used primarily for personal consumption of any employee" has created ambiguity in all the minds. Also what is "primarily used for personal consumption" has led to different interpretation and the matter has been left to Courts and litigation is bundled as a mountain. Similarly what is the necessity of continuing the word "such as" leaving room for including some more endless categories under this umbrella? When the Government intends litigation free tax compliance, avoidance of cascading effect of taxes and ease of business why the same old mind set in drafting by continuing these types of exclusions and prolonging with typical terms. It also contains an exclusion -Ref. Clause 9(e) of Sec.16- for receiving supplies from persons opted for composition scheme under Sec.8. This has been taken from VAT credit provision as exists in some of the states. Restricting set off benefits for Composition Scheme opted person is understandable and why such restriction has to be extended to recipient. Also construction of factory building or premises of service provider is a basic foundation before starting supplies and continuing the same under excluded category through Clause 9 (c) of Sec.16is illogical. We expected new and relaxed ITC and not continuing the same old concept of restriction and litigation. It is requested to exclude only one thing i.e. any GST cost which is not a part of supply of goods and/or services.

The most complicated and herculean tasks are contained in Clause 11(c) & 11(d) of Sec.16. As per these clauses ITC will become eligible only after the supplier has paid the tax to the credit of the appropriate Government and after the recipient of supply files Return under Sec.27. In terms of Sec.27(1), a return, electronically, of inward and outward supplies of goods and/or services, ITC availed, tax payable, tax paid and other particulars as may be prescribed has to be filed within twenty days after end of previous month. So effectively after 20th of previous month crediting will take place.

Clause (41) of Sec.2 defines "electronic credit ledger" as ITC ledger in electronic form maintained at the common portal as may be prescribed. Further as per Sec.35(2) ITC is self- assessed and shall be credited to one's electronic credit ledger in the manner as may be prescribed. Going by the term "common portal" and "self- assessed" it looks the crediting in common portal is based on GSTN ensured tax compliance by supplier and acceptance of the same by recipient.The basic concept of instant credit and utilisation of the available credit as of month end has been defeated. If Government wants to ensure tax has been paid for the supply it should be with supplier only and not to restrict the same at receivers' end. There are many Court verdicts on this line. All along we enjoyed this benefit and restricting the same is not towards "ease of doing business" path.

If the intention is to do reconciliation of supplier and recipient account the task has to be carried out by Government Department through GST Ncommon portal and to take it up with supplier for any mismatch with a prescribed time limit. Proposed matching of tax paid by supplier and allowing credit for the match and on noticing mismatch to take it up with both supplier and recipient as proposed under Sec. 29 is unjustified as far as recipient is concerned. It should be with supplier only. Reconciliation should not be in the way of allowing/disallowing credit. It is to be used for finding defaulting suppliers and to punish them. Holding one month credit amount by recipient of goods and/or services is a big cost to business in addition to following complicated procedure of ensuring tax compliance by supplier and reconciliation of their account with receipt of supplies. Most of the business hours will be spent on this reconciliation. It is requested to allow instant credit as soon as the goods or services are received and to utilize the month end balance for the particular month's GST liability towards output supply. After receipt of goods or services crediting should take place in Common portal by the recipient based on invoice posted by the supplier in Common portal. Also Common portal can be used for reconciliation as contemplated under Sec.29 by Jurisdictional GST Departmental officers of supplier and recipient and to proceed with demand of tax from supplier for any shortcomings under Sec.51.

As per Clause (3A) of Sec.16, ITC cannot be taken after the expiry of one year from the date of issue of tax invoice. Further Clause (15) of same Sec. prohibits ITC in respect of any invoice for supply of goods and/or services, after the filing of the return under Sec.27 for the month of September following the end of financial year to which such invoice pertains or filing of the relevant annual return, whichever is earlier. Here restriction comes even for seven months when an invoice date is March of a financial year. Artificial restriction and contrary to each other.In fact there should not be any time limit for ITC when the supply has been actually received and consumed. Added point is when there is a proposal of ensuring tax paid by supplier through common electronic portal this restriction is unwarranted and shows the mind set of not ready for change towards reform.

Major relief is allowing 100% capital goods ITC during the same financial year of receipt. Of course after ensuring tax compliance by supplier as explained above and non- claim of depreciation (Ref. Clause (10) of Sec.16) on the tax component under the provisions of Income Tax Act. Another important relief is allowing ITC on GTA service without any restriction as "up to the place of removal" as exists now. There were many legal twists from the year 2004 on this point and conflicting Board Circular and Supreme Court Judgments are in our hand right now. Also there is no need of filing cumbersome Rebate Claims for "beyond the place of removal" nature of services as being filed now. To this extent there will be a huge reduction of disputes.

Let us hope the difficulties explained herein above will be taken in a positive note and Government will come out with a real change in approach, make GST as a big reform through simplification, litigation free terms & procedures & allow ease of business as claimed by Hon'ble Prime Minister & Finance Minister.