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.

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