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India implements GST: Understanding ramifications of Input Tax Credit Method

Jul 12, 2017

The Goods and Services Tax (GST) is in. It is a comprehensive indirect tax on manufacture, sale, and consumption of goods and services. It replaces different taxes that the Center and State governments levy separately. The GST contains extensive provisions with regard to the State Goods and Service Tax (SGST); Central Goods and Service Tax (CGST); Integrated Goods and Service Tax (IGST) and other factors related with the supply of goods and services, input tax credit, time and place of supply, valuation, and provisions for transition.

Tax is collected at each stage on the basis of the input tax credit method, in which taxes paid in other states can be claimed. This would allow GST-registered businesses to claim tax credit to the value of GST they paid on purchase of goods or services in other states as part of their normal commercial activity.

Goods and services are not distinguished from one another and are taxed at a flat single rate in a supply chain till they reach the consumer. The administrative responsibility will be with a single authority that will levy tax. Exports will be zero-rated supply whereas imports will be charged the same taxes as those on domestic goods and services—sticking to the destination principle.

How the GST affects the input tax credit method

According to this method, details of the recipient trying to avail credit will be matched with that of the supplier in order to authenticate that the credit was availed. If there is mismatch, the accruing discrepancy will be added on to tax liability of recipient in subsequent month. Moreover, in case of tax not deposited by supplier or transaction details not furnished, GST input tax credit cannot be availed by the recipient and the claims will fall through in case of those supplies.

Thus, by placing the liability on recipient for compliance can be a bone of contention, particularly with respect to the shipping industry where dispatch and handover takes place through several agencies with all of them required to keep a record. This can make the GST system cumbersome for them. Additionally, the time lag can be enormous in such situations, making claim of credit difficult.

With respect to freight and logistics, the input tax credit will have to be accrued from a number of agencies and vendors involved in the process and therefore keeping a veritable track of all vendors may be tiresome. Moreover, enterprises will have to ensure vendors are GST-compliant as well. Payment can be released by the recipient only after the other parties have uploaded the details on GST Network.

A mixed bag for Indian businesses and industry?

The various industries of India now have to analyze and study the provisions of the GST law so as to understand in depth the impact on their trade. It will also help it in formulating responses that will be essential to identify the important implementation requirements for transitioning from the current indirect tax regime to the GST rollout one. Some industry experts are of the opinion that the GST law will present opportunities for industry since the different entities involved in the process will have to review supply chain networks and align them to the new tax provisions which should result in supply chain efficiency. There are views on both the sides.

This article was first published on LinkedIn by Muqbil Ahmar

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