- A tweak in the rules of GST set to generate cash flow problem.
- Companies cannot avail CGST or SGST credit before utilizing IGST credit.
- Tax experts believe this regulation could possibly lead to litigation in the coming few months.
- Industry experts believe companies can solve this problem by reforming their supply chain structures.
A subtle change in the rule of how Goods and Services Tax (GST) should be utilized is set to generate cash flow problem for number of companies starting this month.
The government introduced the credit utilization mechanism late last year (2018) that companies are mandatory to follow from the beginning of this month.
Under the GST framework, one of the aims is to steer clear of double counting of taxes, companies can collect tax paid on raw materials against those levied on goods they sell.
Before the regulation was brought in companies could set out Integrated Goods and Services Tax (IGST) credit against both Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST). Although this cannot be done anymore, after the introduction of new credit utilization rule. Companies cannot avail CGST or SGST credit before utilizing IGST credit.
Tax experts have stated their views on the result of the introduction of new credit utilization rule, saying, it has started to create situations where companies have credit lying in their accounts and yet they have to end up paying GST in cash.
“This amendment has become a point of worry for most industry players, as they may now have to pay SGST liability in cash even in scenarios where prior to this amendment these could be paid by utilizing credits; the reason being the introduction of this new rule of utilization of IGST credit,” said Abhishek Jain, Tax Partner, EY India.
Companies that import goods or have vendors based outside the state are authorized to accumulate IGST credit. Several companies have already started dealing with the concern said by industry experts. Tax experts believe this regulation could possibly lead to litigation in the coming few months.
“The main objective of GST is that there should be no tax cascading but the underutilized or non-utilised credit would lead to exactly that. The constitutional validity of this tax cascading could be challenged in court as credit refunds could only be availed under the inverted duty structure,” said Abhishek A Rastogi, partner, Khaitan & Co.
Industry experts believe companies can solve this problem by reforming their supply chain structures. It may not be possible for every company to alter the structures as supply chains cannot be determined just to save taxes. The earlier tax regulations allowed companies to set off IGST credit partially against CGST and SGST. This usually meant that companies would also set off CGST and SGST credit. However, under the new regulations, it is mandatory to utilize IGST credit first.
Under several circumstances, this means IGST credit is utilized against IGST and CGST tax liability. Even after companies are left with CGST or SGST credit, these credits cannot be utilized to set off remaining CGST or SGST taxes. Industry trackers say that several companies that have their presence in multiple states would notice that in one state their accounts reflect huge credit lying while in other states they would have huge pending taxes.
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