Government’s Plan To Curb GST Credit Could Squeeze New Firms

The government’s efforts to curb goods and services tax evasion may make life difficult for newly incorporated firms.

The GST Council approved restrictions on the use of input tax credit — what businesses get for paying input taxes — by new firms. This may involve completely limiting the use of credit or the capping of claims, as stated by the person on the condition of anonymity.

For the first six months of incorporation, panel officers proposed limiting the input tax credit on supplies made by new “risky” taxpayers to Rs 20 lakh a month. The new risky taxpayers will be those with a new Permanent Account Number and no income tax or company turnover. The government also determines what the new threshold is if anything.

tax consultant bangalore

The government is steadily seeking to control GST evasion as poor tax enforcement adds woes to its revenue collection in the face of a wider economic slowdown. This achieved monthly GST collection of targeted Rs 1 lakh crore in six out of the first 10 months of 2019-20. Potential input tax credit curbs are among other steps to mitigate the tax revenue loss.

While the restrictions would help check fraudulent firms for tax evasion, this could cause substantial hardship for legitimate business players. The government should ensure the versatility of transferring full input credit to companies that can substantiate real eligibility before enforcing the curbs.

The panel of officers decided the Rs 20-lakh limit as the government’s internal review found new taxpayers reported a tax of more than Rs 1 crore within the first three months of registration and used the input tax credit to change their liability.

Over 700 new GST identification numbers registered a tax liability in excess of Rs 1 crore in the first three months of the current financial year. Of these, 450 organizations used as an input tax credit 99 percent of the tax amount due. In the first three months, 2,355 new firms reported tax liability over excess of Rs 1 crore and used input credit of 95-100 percent to pay tax

Tax experts view it differently,

It is important to note that manufacturing firms, in particular, will have substantial credits at the outset due to the capital expenditure incurred in building the plant and machinery. These businesses will usually have only a minuscule tax payable in cash.

The proposed input credit limitations are likely to trigger financial and working capital distress for new taxpayers, given their initial business investments and gestation period to achieve sales and profitability.


There is another problem for businesses as the capping of the input tax credit is not the only option on the table. The panel of officers also indicated that if new firms decide to make more use of credit than Rs 20 lakh, they would have to deposit a fifth of that amount with the government as cash.

For eg, if a new firm claims Rs 1 input credit for crore over the limit, it would have to deposit Rs 20 lakh in cash. Moreover, the number, that can be used to pay GST in the future, will be included in their cash ledger.


After six months of the Rs 20 lakh limit, looking for a cash ledger balance to claim additional credit would only hurt new taxpayers. There were no such constraints in the pre-GST system. The government is taking these steps because it was unable to enforce the automated matching of invoices because of technical failures.

The tax authorities intend to carry out the system from the next financial year to match invoices from buyers and sellers of goods and services.

Latest Updates

  • Navigating Income Tax Filing with Multiple Income Sources
    Navigating Income Tax Filing with Multiple Income Sources Starting early on tax preparations, especially when managing multiple income sources, is crucial. Choosing the right ITR form is the first step towards accurate tax filing, which is particularly important for freelancers, moonlighters, and others with diverse income streams. Simplifying Tax Filing for […]
  • Understanding Taxation of Dividends from Shares and Mutual Funds
    Understanding Taxation of Dividends from Shares and Mutual Funds As the deadline for filing income tax returns approaches, clarity on the taxation of dividends received from investments in shares and mutual funds becomes crucial. The rules surrounding dividend taxation underwent significant changes with the Finance Act, 2020, which abolished the Dividend Distribution Tax […]
  • Understanding Capital Gains Tax on Equity and Mutual Funds
    Understanding Capital Gains Tax on Equity and Mutual Funds Investing in equity and mutual funds can significantly enhance your wealth but also entails tax obligations on capital gains. Capital gains tax is levied on the profit earned from selling investments like equity shares or mutual funds at a higher price than their purchase […]
  • The Importance of Verifying Your Income Tax Return
    The Importance of Verifying Your Income Tax Return Filing your Income Tax Return (ITR) is just the first step in the tax process. To ensure your return is valid, you must electronically verify it within a specific timeframe, usually 30 days, as mandated by the Income Tax Department. Verification can be […]
  • How to Check Income Tax Refund Status for 2023-24
    How to Check Income Tax Refund Status for 2023-24 As the deadline for filing income tax returns for the financial year 2023-24 approaches on July 31, many taxpayers are eagerly awaiting refunds on excess taxes paid. If you’ve already filed and verified your returns, you can easily monitor the status of […]