A written version of a lecture.
Is Your ITC Safe
Input is Not Fully Safe in GST – Reasons and Solutions (Actions Required by the Government)
Your ITC is Not Fully Safe in GST – Reasons and Solutions
Sudhir Halakhandi
The concerns and questions among traders and businessmen regarding the safety of their Input Tax Credit (ITC) in the GST system are increasing. The basic principle of GST is that you deduct the tax paid to your seller from the tax collected from your buyer to calculate your tax liability. Input Tax Credit is considered safe only when the seller has filed their return on time and has made the proper taxpayment . However, in reality, there are instances where the buyer has made the payment for the goods to the seller, but the seller fails to file their return or make the tax payment on time, which jeopardizes the buyer’s ITC. The problems have not stopped here . It has one more dimension regarding the dubious Business activities of the seller on which buyer has no control.
If the seller has timely filed the return and paid the tax, and it appears in the buyer’s GSTR-2B, the matter regrading the safety of ITC should end here but suddenly a notice arrives stating that your seller is “non-existent” or involved in dubious business activities like fake invoicing or fake ITC , and his registration has been cancelled retrospectively, it raises the question of why your Input Tax Credit should be blocked or sometimes even debited directly from your GST credit ledger. Surprisingly, this sometimes happens two years after the purchase, which directly raises the question: the buyer’s Input Tax Credit can be invalidated at any time without any fault on their part!!!!! Let’s see why your Input Tax Credit cannot remain safe and let’s examine what changes the Government should make to the GST laws and its procedures to end this anomaly.
The seller’s integrity is also a challenge in this system. The biggest challenge for the buyer is how they can ensure that their seller is honest , law abiding , concerned about his ITC and will file returns on time. Trust is important in business relationships, but relying solely on trust to conduct business can be risky in this matter. Several factors can raise questions about the seller’s reliability, sincerity, and honesty. Let’s explore the reasons that might question the seller’s credibility:-
1. Seller’s Financial Condition: Often, a seller’s financial condition deteriorates and they do not get a chance to recover, preventing them from making tax payments on time. If there is prior knowledge in the market about such situations, it is wise to maintain distance from such sellers. Making prudent decisions in this regard is appropriate. Moreover, if you hear about a seller involved in speculative activities or selling goods below market price, then you should be cautious before purchasing. In essence, business itself is a full-time job that requires constant vigilance 24 hours a day. Try to understand that if a seller is offering you goods 5% cheaper than the market rate, then you should purchase cautiously because this 5% savings could cost you an 18% ITC. If you find cheap goods, doing a bit of research can secure your ITC.
2. Technical Issues: Often, technical problems on the GST portal cause delays in filing returns. The Government should work on improving the availability of the portal. It seems that this happens every three to four months with breakdown of System .
3. Lack of Compliance: Some sellers intentionally or unintentionally fail to comply, affecting the buyer’s ITC. These sellers are often negligent but not necessarily intending to evade taxes; therefore, buyers should be cautious when making payments.
4. Seller Dishonesty: If a seller plans to evade taxes, buyers, if aware, should not purchase goods from them. However, it is not always possible for the buyer to know about the seller’s intentions. Still, vigilance benefits the buyer.
Even after taking full precautions, if the ITC gets blocked, it can be considered the buyer’s misfortune since many of these factors are not the buyer’s fault. It is indeed strange that despite the buyer not being at fault and having no control over these circumstances, they still suffer losses. While most dealers and sellers comply with the law, vigilance is still necessary to save the interest of Buyer and his ITC.
Why is the Buyer Held Responsible for the Seller’s Deeds or Misdeeds
A Big Question
Under the GST system, if a seller registered by the Government later engages in irregularities or fails to pay taxes, it directly affects the buyer’s Input Tax Credit (ITC). It is a valid question why the buyer should be held responsible for the seller’s mistake.
Seller’s Responsibility
When the Government grants a GST registration to a seller, it authorizes the seller to conduct business activities in accordance with the regulations of GST. This means that the seller has the responsibility to file returns and pay taxes on time. If the seller fails to comply with these rules, it should be the Government’s responsibility to take action against such sellers and recover the taxes due.
Buyer’s Position
The buyer, who has already paid for the goods or services, may not be aware of the seller’s compliance status. The primary responsibility of the buyer is only to ensure that they have correctly paid their portion of the tax. Monitoring the seller’s compliance and holding the buyer responsible for the seller’s mistakes is not justified. Does the buyer have any right to compel their seller to fulfil their duties? If so, this seems like an impossible task being asked of the buyer.
MEASURES FOR SOLUTION
To address these issues, the Government should take the following steps:
1. Strict Action Against Sellers: The Government should take strict action against sellers who do not file returns or pay taxes on time. There should be penalties and other punitive measures in place for this. For continuous default there should be cancellation of RC to stop them form further damage to buyer’s ITC.
2. Protection of Buyer’s ITC: The Government should ensure that the buyer’s ITC remains secure, even if the seller has not filed a return. An automated system could be developed for this. There should be unconditional guarantee. The revenue collection should be like business where your debtors are not paying then you should take strict legal action or ready to bear the loss. Why Government has privilege to collect it from third party (Buyer) who is the easy target.
3. Monitoring of Sellers: The Government should monitor sellers and conduct regular audits to detect irregularities and take timely action.
4. Transparent Information System: Information about the compliance status of sellers should be made available on the GST portal so that buyers can be informed about their sellers and make informed decisions. The information about dubious activities of the sellers must be the part of these reports.
5. Grievance Redressal System: There should be an effective grievance redressal system where buyers can register their complaints and get prompt resolutions. It should be 24X7 with 3 days’ time to take action.
Holding buyers responsible for sellers’ mistakes is not only unfair but also goes against business interests. The Government should ensure that sellers fulfil their obligations, and if there is a lack of compliance, the Government itself should take action against them . The protection of the buyer’s ITC should be the Government’s responsibility, which would maintain the confidence of the business community and allow them to conduct business with peace of mind.
To solve this issue, the Government and the business community need to work together. Here are some other potential solutions:
1. Seller Credibility Check: The Government should check the credibility of sellers. This can be done by viewing the seller’s compliance status on the GST portal. The Government should act swiftly in this regard to identify such sellers so that buyers can be cautious. When GST was implemented, the Government had promised that it would rate sellers based on their compliance on the portal, but this has not been implemented. If the Government draws a red line against certain sellers, buyers will automatically stop purchasing from them, and all these problems will be solved, provided that the sellers approved by the Government have fully secured ITC. This will also encourage sellers.
2. Penalty for Not Filing Returns: The Government should take strict action against sellers who do not file their returns on time or deposit the tax in time. The provision for penalties and punishments should be stricter, and for repeated offenses, their registration should be permanently cancelled. Although harsh, this step is necessary given the current challenges to the buyer’s ITC.
3. Development of an Information System: A system should be developed where both buyers and sellers can access information about their compliance status. This will bring transparency to business transactions.
4. Laws for ITC Protection: The Government should enact strict laws to protect the buyer’s ITC so that the buyer’s hard-earned money remains safe. This is a major issue, and the Government has not yet taken any action in this regard. There should be a document that can secure the buyer’s input credit.
If a seller does not pay taxes, the Government incurs a loss, which it cannot afford under any circumstances. It’s true, but the recovery should be made from the seller, whether from their property or by any means. However, the easiest method considered is to catch the buyer during business transactions, block their input credit, and recover from them. Since the buyer has already paid the tax to the seller, recovering it again from them is effectively double taxation, which is not just and as per natural justice.
Furthermore, if a seller does not file their GSTR-1 by the 11th, then the buyer does not receive the credit for that month. The Government should change this provision and make it such that if the seller files the GSTR-1 before the buyer files their GSTR-3B, then the buyer should receive the input credit.
The Government is also collecting taxes twice – Is this justifiable?
Let’s consider another aspect. When a seller’s registration is cancelled for some reason, the Government first blocks the buyer’s Input Tax Credit (ITC) and recovers it from them, but efforts to recover from the seller continue. However, the buyer whose credit is blocked does not benefit from this recovery. If we look closely at this whole situation, if the Government also recovers from the seller, then the Government has received the same tax twice from two sources. Shouldn’t the Government return the excess tax collected if it manages to recover it from anywhere in the chain? In the race to maximize revenue collection, has natural justice been left behind?
When does the department find out about the seller’s mistake?
When a buyer purchases goods or services from a seller and pays for them, GST is applied. The buyer receives the GST credit when the seller files their return on time and pays the tax. However, if the seller fails to do so, the buyer cannot benefit from the ITC. This means the buyer has to compensate for the tax themselves, increasing their financial burden since they have already paid the tax amount to the seller. This is clear double taxation.
Buyer’s Responsibility
In the current system, the buyer must ensure that their seller files return and pays taxes on time to safe their ITC. However, placing this responsibility on the buyer is not only unfair but also impractical. Buyers do not have the capability to monitor the financial status and compliance of their sellers. The department does not immediately find out when a seller has failed to fulfil their responsibility, which is a biggest deficiency in the entire system.
Current System’s Flaws
1. Technical Problems: There are still many deficiencies in the GST portal and other technical tools, which fail to properly monitor the activities of sellers.
2. Lack of Data Analytics: There is a lack of sufficient and rapid data analytics, which fails to detect suspicious activities promptly.
3. Lack of Human Resources: There is a shortage of adequately trained staff in the departments who can ensure fast monitoring and compliance.
4. Delayed Action: It takes a long time to investigate and act against a seller, which delays the detection of dishonesty.
Remedial Measures
1. Advanced Information Technology: Advanced information technology and artificial intelligence (AI) should be used in the GST system to quickly detect suspicious activities.
2. Real-Time Data Analytics: Real-time data analytics should be used to immediately monitor the activities of vendors and identify dishonesty.
3. Monitoring and Investigation Teams: A special monitoring and investigation team should be formed to regularly inspect the activities of vendors and take timely action.
4. Automated Alert System: An automated alert system should be developed that sends alerts immediately on suspicious activities and enables necessary actions.
5. Strict Penal Provisions: Strict penal provisions should be implemented for vendors found to be dishonest to serve as a warning to others.
6. Cooperation and Coordination: Improved coordination and cooperation between central and state tax departments should be ensured to quickly detect any dishonesty and facilitate action.
7. Use of AI by Officers: Officers should be trained to use AI and take swift action to limit these problems.
The current GST system has several technological and management shortcomings that delay the immediate detection of dishonest vendors. To address these issues, advanced technology, real-time data analytics, special monitoring teams, and strict penal provisions are needed. If the Government adopts these measures, improvements in the GST system are possible, and dishonest vendors can be quickly caught, thus increasing the trust of buyers and honest traders.
“CHOOSE YOUR VENDOR CAREFULLY”
Is this Practically Possible in GST?
The importance of “Choose Your Vendor Carefully” in the GST system, especially in terms of protecting Input Tax Credit (ITC), is a critical element. Officially, it is often said that buyers should always be cautious, and this rule tries to ensure that buyers select vendors who comply properly with GST and file returns on time. This ensures that the buyer receives their rightful input tax credit.
However, practically, how relevant this recommendation is and how easily it can be implemented needs consideration. A buyer can assess the quality of goods, see timely supply, and make payments to the vendor on time, but how can a buyer know what the vendor does after receiving payment, from where the goods have been purchased by him, or whether the tax is deposited on time?
Here are some key points:
1. Business Practices and Relationships: For a business, especially MSMEs (Medium and Small Enterprises), it is not feasible to constantly search for new vendors. They usually depend on vendors with whom they have long-standing relationships. Switching from old and trusted vendors to new ones could weaken business relationships.
2. Lack of Information: Not all buyers have the necessary means and information to thoroughly check their vendors’ GST compliance. The information available on the GST portal is limited and does not include all necessary details.
3. Business Dependency: Often, businesses rely on specific vendors for their special needs, making it difficult to switch vendors even if they are weak in GST compliance.
4. Loss of ITC: If a vendor does not comply properly with GST, the buyer could lose Input Tax Credit, which can become a financial burden. This problem becomes more severe when the purchase of goods or services from the vendor has already been completed and paid for.
Although it is correct to say “Choose Your Vendor Carefully,” practically, it is not that easy. Considering the limitations of business relationships, needs, and information, it is not always in the buyers’ control to choose their vendors. Therefore, it is essential that the Government and GST authorities provide more awareness and facilitate measures so that both buyers and vendors can effectively comply with GST rules.
System for Providing Information from Whom the Goods Were Purchased
The biggest deficiency is that there is no system under the GST framework to inform the department about from whom the buyer has purchased the goods. This could identify which vendor has been dishonest in tax payment within the same month. There was such a system in the initial GST law, but it was never implemented. This is the reason why it takes a long time for the department to catch a vendor’s evasion of tax, and by then, the buyer could suffer significant losses. It is surprising that if the system was not ready at the initial stage , it still isn’t ready even after seven years!!!!!!!
SOLUTIONS
1. Re-establishment of Initial System: The system where a buyer had to provide the seller’s information to the department should be reinstated. This would immediately provide the department with information and identify any discrepancies.
2. Sharing Real-time Data: Both buyer and seller should share their returns and transaction information with the department in real-time. This would allow the department to immediately identify who is committing tax fraud. The department could automatically create a list of mismatches for each dealer and identify which seller’s data does not match with their buyer’s data.
3. Use of Advanced Technology: The department should be enabled to quickly detect suspicious activities using data analytics and Artificial Intelligence (AI).
4. Strict Monitoring and Action: The department should strictly monitor the activities of the sellers and take immediate action upon detecting any discrepancies.
5. Development of an Information System: An information system should be developed where transaction details of both buyer and seller are readily available and can assist the department in taking immediate action.
6. Robust Complaint System: There should be an effective complaint system where buyers can report their issues and suspicions, and the department can take immediate action.
If the initial arrangement of the GST law is fully established, where the buyer had to provide information about the seller to the department, the department could immediately detect any discrepancies and protect the buyer from potential losses. This would require advanced technology, sharing of real-time data, and strict monitoring. Thus, the GST system could be made more effective and transparent, enhancing trust among all parties.
If there are doubts about the security of the input credit claim and the current laws are not appropriate, the following points could be considered for making an effective and just law regarding this issue.
1. Clear Definitions:
A clear definition of input credit and its qualifications should be provided, and if a buyer’s purchase falls within this definition, then their input should ultimately be accepted.
The circumstances under which input credit will not be available should be clearly defined in advance and publicized so that buyers remain alert and prepared for these events.
2. Evidence-based Claims:
If there is dispute regarding ITC , the claims for input credit should be settled through solid evidence and documentation. The final documents should be decided upon and declared by the Government in this respect
Whenever there is a dispute, it should be mandatory to present purchase invoices, proof of payment, and related tax invoices in support of all claims. This evidence should be conclusive, and the buyer’s responsibility should end here.
3. Automated System:
There should be an automated system that can check and verify claims of input credit in real time.
This system should be connected to the GST Network (GSTN) so that all transactions are transparent and trackable.
4. Accuracy of Details:
– Strict rules and penalties should ensure the accuracy of the details submitted.
– There should be severe punishment and penalties for making false or incorrect claims.
5. Re-Examination and Dispute Resolution:
– An independent authority should be established for the re-examination and review of input credit claims.
– There should be a quick and effective process for dispute resolution.
6. Transparency and Reporting:
– Taxpayers should regularly report their use of input credit and the remaining balance and the safety of ITC.
– The Government and tax department should periodically analyse and report this data.
7. Coordination Between Buyer and Seller:
– Technical solutions should be implemented to enhance coordination between buyers and sellers so that the claims made by both parties match.
– This will reduce the possibility of fraud and increase transparency.
8. Improvements and Training:
– Merchants and taxpayers should be regularly trained and informed about the process and rules of input credit claims.
– Information about any changes in laws and procedures should be provided in a timely manner.
By implementing these suggestions, the security and reliability of input credit can be enhanced, and the GST system can be made more transparent and effective. Additionally, penalizing the buyer for the seller’s mistakes should be ceased until it is proven that the buyer is involved in tax evasion.
“Various types of relief have been initiated in the 53rd GST Council meeting, so now measures and guarantees for the protection of buyers’ input credit should also start soon, and a final rule for collecting taxes from sellers should be established. Let’s finally see what is happening at this time. Currently, an impossible responsibility has been placed on the shoulders of the buyer to ensure that the seller deposits taxes, files returns, and remains honest. This is an exception to ‘Lex non cogit ad impossibilia’ – The law does not compel the doing of impossibilities.
– Sudhir Halakhandi
Author Bio
