CMA Bhogavalli Mallikarjuna Gupta

Bogavalli Mallikarjuna Gupta

In the current tax architecture of India, Input Tax Credit i.e CENVAT Credit in case of purchase of manufactured goods and VAT credit in case of purchase of goods within in the same state is available based on the sales invoice issued by the selling dealer. The buyer on receipt of the goods will avail the input tax credit and adjusts / offsets it against the output tax liability. This process is simple for the business houses as credit is available immediately and saves the cash flows. Now let’s look from a taxman’s perspective.

1. The selling dealer pays the tax in the subsequent month and the tax collection / revenue increases. The buying dealer avails the credit, no impact on the tax collection as the amount got collected is utilized by the buyer in the same month or subsequent months.

2. The selling dealer does not pay the tax and the buying dealer avails the credit, in this process, there is revenue loss to the government.

In the second case, the government is not receiving any income but the buyer is availing credit, that means there is revenue loss and from a taxman’s parlance it is also known as revenue leakage. This happens due to some black sheep in the system and it also increase the menace of black money in the economy as the payment from the buyer goes unaccounted.

To plug this, it is being proposed to rate the dealers similar to CIBIL which evaluates the individuals for their creditworthiness. CIBIL report is followed by the banks before disbursing loans to the individuals. If the CIBIL score is good, the individual is disbursed with loan or rejected or disbursed if any discrepancies are cleared.

To avoid the revenue leakage, it is being proposed in GST that input tax credit will be available only when the seller pays the tax liability.  The input tax credit is now under the control of the seller and the GSTN and no longer in the hands of the buyer. This is paradigm shift from the current process of availing the credit immediately on receipt of goods in case of Central Excise or receipt of invoice in case or service tax. The buying dealer is eligible for the input tax credit only when he selling dealer pays the tax liability.

Now the question arises, how will the buyer know if the seller is prompt in his tax payments?  The government intends to send alerts on all the defaulting dealers though SMS with all his registered buyers and also make this information public. This process is called blacklisting of dealers. The blacklisting of dealers is not only based on this condition but also on other conditions

1. Continuous default for 3 months in paying ITC that has been reversed.

2. Continuous default of 3 months or any 3 month-period over duration of 12 months in uploading sales details leading to reversal of ITC for others. Defaulters of even a single event should also be flagged and put in public domain as being a potential black listed dealer so as to alert the buyers.

3. Continuous short reporting of sales beyond a prescribed limit of 5% (of total sales) for a period of 6 months.

Business Implications

Does purchases from a blacklisted dealer has business implications? The answer is “YES”.

Increase in the cost of production  – if the seller does not remit the tax, it means the buying dealer cannot avail input tax credit, that means, the tax has to be treated as an expense based on the prevailing accounting standards. The moment it is taken as an expense tax, the cost of production will increase and thereby hitting the bottom line of the company.

 Increase in the working capital limits – if the input tax credit it not available to the buying dealer, it is a double edge sword. As input tax credit is blocked for the said purchases, the output tax liability has to be paid from through cash that means there will be impact on the cash flows and there by impacting the working capital. Again more working capital means more financial costs, more financial costs means impact on the bottom-line of the organizations. It is expected that based on the nature of the industry there will be an average increase of 10% to 20% of the working capital. The business houses have to work on the modalities to meet the same either by applying for increased limits or fund through the same through internal accruals or by other means.

Complexity in handling the external reporting – the proposed laws under GST are not stringent, the input tax credit is available once the selling dealer remits the taxes. The complexity arises now, if the purchases are done in the month of February 2016 and the selling dealer remits the tax in May 2016. How do we handle this in the financial reporting as in India the financial year is 1st April to 31st March. As the credit is related to prior period item, do we need to make necessary changes to the reported financial statements? The other challenge is if the input tax is treated as recoverable, and the dealer does not pay and there is change of financial year, how to report the recoverable tax as expenses?

Cost sheets have to be submitted and if there is change post submission how to handle the same? These concerns have to be raised by the organizations directly or through trade bodies to make representation to the government.

Why blacklisting is being proposed

1. Only for regulating ITC by others.

2. Will be based on dealer rating. A dealer will be blacklisted if dealer rating falls below the prescribed limit.

3. To be put in public domain.

4. To be notified (auto-SMS) to all dealers who have pre-registered this dealer (black listed now) as their supplier.

5. To be prospective only (from month next to blacklisting)

6. Blacklisted GSTINs cannot be uploaded in purchase details. Corresponding denial of ITC to be supported by suitable provision in the law.

7. ITC reversal in hands of the buyer should take place for disowning of any tax invoice with date prior to effect of blacklisting of the seller.

8. Once blacklisting is lifted, buyers can avail unclaimed ITC subject to this dealer uploading sales details along with tax and interest.

How avoid getting into the trap?

In the current business process of any organization, the parameters which the purchasing teams look into while procuring the goods are

1. Quality of the goods

2. Consistent supply of the goods

3. Timely delivery

4. Prompt after sales service if required

5. Cost of the goods

6. Any other specific parameters based on the need of the hour

Payment of taxes by the seller also has to be added to the above list, this will ensure that the cost of production does not go up and also the cash flows which in turn impacts the bottom-line of the company/organization. This means the purchasing teams should be trained on the implications of the GST in advance to avoid any unpleasant surprises once GST is rolled out.

In most of the case the buyer has the upper hand and he can release the payment to the supplier once he gets confirmation that the taxes have been paid or reduce the tax amount from the suppliers payment. If the buyer opts for the second approach, the issue is resolved to some extent.

Can the new process proposed under GST will work? Only time has to answer this question……

Any views or opinions represented in this section are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

(Author has written book titled “Roll Up Your Sleeves for GST, The Impending Tax Reform in India” and can be reached at

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December 2023