Gautam Buddha is reported to have said that life is like the harp string, if it is strung too tight it won’t play, if it is too lose it hangs, the tension that produces the beautiful sound lies in the middle. In the matters of administration also, the middle path which prevents the frauds and at the same time does not make the genuine taxpayers as victims is essential.

Vide Notification No. 94/2020 – Central Tax dt. 22.12.2020 effective from 01.01.2021, far-reaching curbs have been put in place to tackle the menace of fake invoicing. We don’t disagree with the intent but then there is also a need to ensure that the wide powers now granted to the officers are not misused. Tightening of the system (to prevent frauds) may lead to the strangling of the genuine taxpayers in absence of specific safeguards to avoid the adverse consequences in situations (such as financial difficulties) which are beyond anyone’s direct control.

Therefore in the present write-up we share the brief of the changes made and the possible suggestions to protect the interest of the genuine taxpayers. Readers may refer our earlier detailed write-up on the changes made or the presentation to understand the legal nuances.

Amendments made w.e.f. 01.01.2021 have taken a concerted approach to prevent the fraudsters, indulged in fake invoicing, from perpetrating their actions. Same can be summarized as follows (along with our suggestions to protect the interest of genuine taxpayers).

Area Amendments w.e.f. 01.01.2021 Suggestions
Registration First area in which changes have been made is with respect to the process of obtaining the registrations. W.e.f. 01.01.2021, Rule 9 has been amended to the effect that the persons applying for registration may have to undergo physical verification of the premises even if their application is Aadhaar authenticated. Said physical verification can be sought with the approval of an officer authorised by the Commissioner not below the rank of Assistant Commissioner. If such physical verification is demanded, the time limit to grant the registration shall be 30 days as against the normal time limit of 7 days. It is suggested that the reasons for demanding the physical verification be recorded on the file and the same be open for scrutiny in appropriate proceedings so that said powers are not misused to delay the grant of the registrations. Objective checklist must also be prescribed for undertaking the said verification to avoid the subjectivity.
ITC availment Next area where changes have been made deals with the availment of ITC. Rule 36(4) has been amended to restrict the availment of the ITC beyond 5% of the eligible ITC for which the details have been furnished by the corresponding vendors. Exceptions must be carved out in situations where the vendors have not been able to file GSTR 1 either on account of non-filing of GSTR 3B for the preceding two months on account of genuine financial difficulties in making the payment of tax or have not been able to file GSTR 1 due to technical issues. Suitable option should also be created for quarterly filers (not opting for invoice furnishing facility). ITC must also not be restricted if the tax has been duly paid to the vendor. Government machinery for the collection should approach the vendor and not deny the ITC of the genuine recipient.
Payment of tax Rule 86B has been introduced to seek payment of atleast 1% of the output tax in cash despite the availability of ITC balance. Certain exceptions (which will largely exclude the genuine taxpayers) have also been provided. Over and above the specific exceptions, a generic exception in the form of granting the power to the Commissioner to remove the said restriction subject to conditions have been provided. There will be instances where a genuine taxpayer (e.g. newly incorporated subsidiary of a foreign company having foreign-national as MD) may not get excluded. In such situations, it is suggested that the criteria’s for allowing the Commissioner to exercise the powers must be stipulated to avoid the subjectivity.
Prevent filing of GSTR – 1 Rule 59 has been amended to provide that filing of GSTR 1 shall be blocked if GSTR 3B has become due and has not been filed for the preceding two months (for normal tax payers) or preceding quarter (for quarterly filer) or preceding month (for taxpayer covered by the minimum 1% cash payment rule). It must be appreciated that due to financial hardships (accelerated due to COVID 19 for certain sectors), many genuine taxpayers may default in paying the tax in time and hence the filing of GSTR 3B. Further law also does not stop such taxpayers from filing GSTR 3B showing the taxes as due. Hence exceptions must be created for situations beyond the control of the genuine taxpayer. Suspending the facility to file GSTR 1 will only deteriorate the problem for such struggling businesses.
Suspension/cancellation of registration Wide powers are granted to suspend the registrations on (a) availment of ITC in violation of law (b) furnishing GSTR 1 with values higher than GSTR 3B (c) violation of Rule 86B and (d) significant differences or anomalies observed in the GSTR 1/GSTR 3B filed. Suspension of registration shall bring a halt to the business as the taxpayer cannot make any supplies after the suspension. Suspension can be revoked only if the officer is satisfied with the submissions. In case of non-satisfaction, the officer shall initiate the proceedings for cancellation of registration. Suspension of the registration even before hearing the submissions of the taxpayer violates the fundamental principles of natural justice. In many situations the figures reported in GSTR 1 could be higher than GSTR 3B due to genuine reasons (e.g. amendments in GSTR 1 (e.g. missed invoices reported later, payments made through DRC 03, errors in B2C reporting, Credit notes furnished late, Credit notes higher than sales, etc.). Also Circular No. 26/26/2017-GST itself acknowledges the scope of committing errors in GSTR 3B and permits the subsequent corrections. Hence it is suggested that (a) hearing must be called and submissions be considered for exercising the power to suspend (although a shorter time frame may be decided to conclude the said proceedings) and (b) exceptions be created in Rule 21A for situations where the discrepancies can be genuine.
E-way bill validity Rule 138(10) has been amended to reduce the E-way bill validity period by 50%. The reduced validity period seems to be reasonable based on the average truck speed as well as the stoppages. There is also a mechanism to seek the extension (but within 8 hrs).

Above table will reflect that the intent behind the amendments is to strangle the fraudulent taxpayers from gaming the system. However, the suggestions, if taken sincerely, can go a long way in avoiding a genuine taxpayer become its victim.

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