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Is it possible to have GST without ITC (Input Tax Credit)? Why don’t we make it simple for small business entities?

There is big list of FAQ s on the Input tax credit

ICAI has published in July 2021 a book on “Practical FAQs on Input Tax Credit”.

34 experts have contributed in the preparation of the FAQs.

The booklet covers mainly on six headings namely

Sl Topic No. of FAQs Answered
1 Eligibility and Conditions for taking ITC 62
2 Apportionment of ITC and Blocked ITC 102
3 ITC in Special Circumstances 23
4 ITC and Job Work 4
5 Distribution of ITC by Input Service Distributor 4
6 Miscellaneous 85
     Total FAQs 280

It is an exemplary work done by the experts, where number of situations are assimilated and detailed answers were given quoting the references from the Act and Rules.

The pertinent point here is that how many business men understands the intricacy of availing the Input Credit, which essentially means an ingredient of the working capital inflow. To my knowledge it is difficult for the tax professional to be aware of many intricate situations leave alone the business men, who have multiple issues to be tackled on a day-to-day business.

Let us see few headlines on ITC

“This concerted nationwide drive against bogus GST invoice fraud has ensured better GST compliance to identify tax evaders and those availing input tax credits fraudulently, and thus, has resulted in record GST collection to the tune of more than Rs 1.15 lakh crore for December, 2020.” Source Economic times.

“ITC of approximately Rs 14,000 crore involving 66,000 taxpayers stands blocked as on date. This is only 0.38 per cent (approximately) of average ITC utilised by all taxpayers in a financial year,” tweeted GSTN, the company that handles the technology backbone for Goods and Service tax – Source ET 12.10.2021.

“The government had introduced Rule 86A in GST rules in December 2019 giving powers to taxmen to block the ITC available in the electronic credit ledger of a taxpayer if the officer has “reasons to believe” that the ITC was availed fraudulently.”

Input Tax Credit (ITC) is an important feature of the Goods & Services Tax regime in India. However, there have also been several cases of ITC fraud detected in the last few years. Between 2018-19 and 2020-21, a total of Rs. 37.48 thousand crores of fake ITC claims were detected by the government amounting to 1.06% of the total GST collection in these three years. In 2020-21, this percentage went up to 1.51%.

Source:https://factly.in/data-amount-of-fake-itc-under-gst-increased-to-1-5-of-total-gst-collection-in-2020-21/

Responding to the RTI application filed by Raipur-based chartered accountant (CA) Madhur Agrawal, , the central public information officer (CPIO) of GST Network (GSTN), S Mohan, says, “The amount of ITC blocked from all such taxpayers is Rs6,14,010.81 crore (Rs6.14 lakh crore). The amount of ITC pertaining to a period exceeding one year from the date of blocking such ITC blocked under Rule86A of the CGST Rules is Rs296311.45 (Rs2.96 lakh crore).”

“The information provided by GSTN shows that Uttar Pradesh (UP) has a maximum amount of Rs5.82 lakh crore ITC blocked from 10,174 taxpayers. Delhi has the maximum number of taxpayers at 13,539, whose Rs5,744.75 crores are blocked under Rule 86A towards ITC. “

Source:https://demo2020.moneylife.in/article/gst-issues-a-whopping-rs614-lakh-crore-input-tax-credit-itc-remains-blocked-through-rule-86a-reveals-rti/65349.html

“GST” is a very good concept and it needs further refinement in its Ease of Compliance and Understandability. In my opinion many are still not very sure about the same.

Let us see some of the Statistics published by GSTN vide their report “A Statistical Report on Completion of 4 years of GST”

$ Please note that the tables are not reproduced exactly the way it is reported but wherever needed, it is summarised for easy readability.

Table I

Turnover Slabs – Outward Supply of Tax Payers as per GSTR 3B
Up to 5 lakhs 1,125,571 15.11%
5 to 10 lakhs 706,407 9.48%
10 to 20 lakhs 944,758 12.68%
20 to 30 lakhs 641,746 8.61%
30 to 40 lakhs 468,437 6.29%
40 to 50 lakhs 360,905 4.84%
50 lakhs to 1 Crore 1,033,425 13.87% 70.88%
1 Crore to 5 Crores 1,483,535 19.91% 90.79%
5 Crores to 10 Crores 312,782 4.20%  94.99%
10 Crores to 50 Crores 298,821 4.01%
50 Crores to 100 Crores 37,124 0.50%
100 Crores to 500 Crores 30,079 0.40%
Above 500 Crores 7,378 0.10%
7,450,968 100.00%

Table II

As on 31.03.2021 taken on 01.07.2021
Constitution  No. of Tax Payers % Age  Collection % Age
Companies 859,093 6.6% 2,343,816 72.2%
Proprietors 10,398,893 80.2% 433,255 13.4%
Partnership 1,380,441 10.6% 238,446 7.3%
Govt. Departments 7,382 0.1% 33,573 1.0%
Others 325,025 195,721 6.0%
12,970,834 100.0% 3,244,811 100.0%

Table III

Tax Slabs for 500 Services & 1300 Products

5%

12%

18%

28%

Now let us analyse the issues one by one

1. It is a Goods & Service Act. It is well known fact that “Goods” and “Services” are not in equal footing. As far as “Input Credit” is considered the level of adjustment that can be made when the final liability of tax payable on any month or a year differs very much for the “Goods” and “Services”. It is mainly due to the composition of the percentage of Man Power in the total cost. The percentage of “ITC” that can be utilised by these sectors are considerably different. So there is a need to understand these sectors separately.

2. If we analyse the data available in Table I & II, we can understand the following:

a) As per GSTR 3B data the number of tax payers Between 5 lakhs to 1 Crore as per Table I is 70.88%, From 1 crore to 5 crores is 90.79% and up to 10 crores it is a whopping 94.99%.

b) It can be concluded that 95% of the tax payers are within 10 crores limit.

c) From Table II it is seen that 80.2% of tax payers are Proprietors and 10.6% are Partnership. Put together it is 90.8%

d) In my opinion Most of the businesses run by Proprietors and Partnership will come within the slab of 5 lakhs to 10 Crores. But the collection percentage is only 13.4 and 7.3 respectively.

e) No information is available on the “ITC” utilised in the report published.

Conclusion:

Even though full details are not available, based on the data and information available in the published report, the Government can attempt the following realignment based on either “Constitution” of the business or on the GSTR3B turn over. The “ITC availed” data, available with the Government can help to rationalize the prevailing tax rates

1. To those tax payers who want to avail “ITC” and those who do not want to avail.

The rationalized reduction in tax rates for the people who are not willing to avail “ITC” can be determined based on the following

a) Based on constitution

b) Based on “Goods” and “Services”

c) Based on GSTR 1 & GSTR3B details

d) On both a, b & C

This will help the taxpayers of nearly 70% with simple formalities and Government will be relieved of heavy monitoring work.

If the rationalization is done with reference to the Sectors Manufacturing / Trading / Service, many will opt for rationalized reduced tax rates instead of availing ITC.

Illustrative Table
Constitution Outward Supply Manufacturing Trading Service
Normal rate Effective Rate Normal rate Effective Rate Normal rate Effective Rate
All up to 1 Crore 18 4.5 18 4 18 6

I solicit critical views from the readers.

Other Sources:

http://gstcouncil.gov.in/gst-system-statistics

https://economictimes.indiatimes.com/news/economy/finance/gstn-blocks-rs-14000-crore-input-tax-credits-of-66000-taxpayers/articleshow/86965100.cms?from=mdr

Author Bio

Qualification: CA in Practice
Company: N/A
Location: Chennai, Tamil Nadu, India
Member Since: 04 Jul 2021 | Total Posts: 1

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