Critical Decisions for SMEs Expected from GST Council, ICAI Reaches to FM for SMEs' Perspective

The whole world is witnessing the magical implementation of GST in India. To define magical implementation the only one justification could be enough that – this is directly impacting more than 5.5 Million MSMEs of India. ICAI writes to finance minister in order to get his attention towards SMEs and some burning issues with GST implementation.

GST was introduced with effect from 1st July 2017. GST replaces different taxes and also aims at simplifying indirect taxation. The GST Council has been working continuously for making many improvements for better implementation. While the efforts of the GST Council are laudable, there is one important and vexatious problem that needs to be addressed to ensure GST roll out is smooth for all taxpayers, more so for those in the SME sector.

One of the most important provisions in the GST law is that input credit is available to the buyer only if the GST has been remitted by the seller to the Government. This way, the Government is completely shielded from anyone who collects tax but fails to remit it. It is true that there is a small minority of tax payers who may keep the government away from its rightful revenue. But to handle problems caused by a small number of such dishonest persons the Government is putting a huge burden on the entire taxpaying community. Just imagine a situation where a person goes to a Police Station to report theft in his house and the police tell him to fetch the culprit and sort out the matter mutually or accept the loss.

Today there are many safeguards in the system, like Aadhaar, etc, which make it difficult for someone to evade taxes. Such technology must be put to good and provide small and medium businesses an easy and simple way of claiming what is rightfully theirs.

The impact of this provision is as follows.

1)      Several market behaviours will emerge. Some will refuse to pay the supplier until the 30th of the following month, leading to abnormal increase in working capital needs. Some will refuse to pay the tax portion, leading to multi-step transactions and increase in both working capital needs as well as cost of doing business. Some will be asked for bank guarantees to cover the possible risks and in all cases most SMEs will have no simple way to respond to such a demand.

2)      If the credit cannot be assured on receipt of a valid GST invoice, there is no motivation to either upload the invoices, or accept them – since the credit is, anyway, given only if the payment cycle is completed.  This has the danger of slowing down business, making it difficult to find new buyers, and even to retain existing buyers.  It has the huge risk of increasing motivation of keeping more transactions outside the GST net, since it will be ‘simpler’ to do those transactions, and ‘more complex’ to do transactions under GST (as such transactions will have the long cycle of awaiting closure till payment cycles of tax are completed by the supplier).

3)      Small businesses may actually end up paying GST twice. First to the seller and then once again to the government if the seller has not remitted GST he has collected.

Now, SMEs are trying to raise their voices and request the GST council to remove this condition and the buyer gets input GST credit based on the invoice uploaded in the GST portal by the seller and accepted by the buyer.

In a letter to Hon’able, Finance Minister, ICAI have Clarified that the input tax credit should not be denied to buyer for mistake of seller. The letter highlighted the concerns of SMEs, by notifying, “The proactive response to the challenges of SMEs and IT glitches for encouraging compliance in GST are acknowledged by all stakeholders. We at ICAI would like to take this opportunity to thank the Government for involving us to make GST simple, fair and transparent.” ICAI also mentioned in that letter that the CA body understands that further simplification process of uploading of invoices by supplier and its acceptance by the receiver as suggested by Mr. Nandan Nilkeni is being discussed, but have also pointed out that, “One concern which may already be/ being considered which was raised by us in the initial suggestions could limit the gains.”

The Letter also illustrated possible situations and concerns such as, “The taxable goods/services are being supplied by the supplier under cover of tax invoice which contains tax. The supplier collects the invoice value including the tax portion from the buyer. Later the supplier may not pay the tax collected to Govt or may fail to file the returns. Assessee who is the buyer goes on to claim credit based on the tax invoice of the supplier based on bona fide belief that the taxes have been remitted by seller to Govt treasury.”

ICAI also noted in it’s letter to the Finance  Minister that in this backdrop, it is important here to note the relevant provisions made for ITC under the Central Goods and Services Tax Act, 2017(“the CGST Act”) which states that every registered person shall be entitled to take credit of input tax charged on the supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

“The credit will not be allowed unless the tax charged in respect of supply has been paid to the Government, either in cash or through utilisation of ITC.” The letter explains, “The benefit of input tax credit is denied to a bona fide purchaser, because of the default of the selling dealer over whom such purchasing dealer has no control.”

However as a concern of trade and professional that the eligible ITC should not be denied to the bona fide purchasing dealer merely for the fault of selling dealer considering that the law should be fair. It should not be made the responsibility of the purchasing dealer to ensure that the tax is deposited by the selling dealer when the transaction is bona fide, ICAI suggested.

However, the GST Council should consider the interest of SMEs while discussing the challenges and issues that are getting faced by Millions of SMEs. This is very critical issue for their smooth functioning afterall they are been considered and acknowledged as ‘Engines of Growth’.