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.
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
- Simplified Taxation for Small Businesses: A Guide to Section 44ADSimplified Taxation for Small Businesses: A Guide to Section 44AD Tax compliance in India can be a daunting task, particularly for small businesses. Maintaining detailed financial records and going through complex tax computations can be time-consuming and costly. To simplify tax procedures and reduce the compliance burden, the Income Tax Act introduced the […]
- Budget 2025: No Tax on Income Up to ₹12 Lakhs – Key Updates & CalculationBudget 2025: No Tax on Income Up to ₹12 Lakhs – Key Updates & Calculation In the Union Budget 2025, the Finance Minister introduced a groundbreaking change in the tax structure, allowing individuals with an annual income of up to Rs. 12 lakh to pay no income tax. This is not […]
- Taxation of Cross-Border Transactions in India Under the Income Tax Act, 1961Taxation of Cross-Border Transactions in India Under the Income Tax Act, 1961 In today’s interconnected global economy, international transactions have become a fundamental aspect of business operations. Companies engage in cross-border trade, foreign collaborations, and overseas investments, necessitating a clear understanding of taxation laws. Navigating the complexities of Indian tax regulations is […]
- Major GST Amendments in the Finance Bill 2025Major GST Amendments in the Finance Bill 2025 The Finance Bill 2025 proposes 11 significant amendments to Goods and Services Tax (GST) provisions, aiming to rectify anomalies, introduce new compliance measures, and clarify legal ambiguities. These changes, effective from April 2025, impact input tax credit (ITC) distribution, tax compliance, and procedural aspects of GST. 1. […]
- Review of TDS/TCS Amendments in Budget 2025Review of TDS/TCS Amendments in Budget 2025 Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) provisions are integral to the tax system, ensuring tax collection at the source of income. However, the complexity of multiple sections, varying threshold limits, and diverse tax rates often leads to compliance challenges for both […]