Goods and Service tax collections are facing a tough time. The collections remain below the target and this is giving government a fiscal headache. The Government has thus decided to plug the loopholes in the procedures that can be exploited by the businesses. One such loophole is claiming of input tax credit by the buyer of an item if the tax paid by buyer(to supplier) is not uploaded by the supplier in the right amount and against the right invoice number. The government has decided to plug this loophole by limiting the amount of Input tax credit claimed by the buyer in case the supplier fails to upload the invoices or uploads wrong invoices.
Before going into the merit of above decision , it is very important to understand the importance of Input Tax Credit(ITC) in the whole GST framework. The idea of GST is based on the philosophy of the Value Added Tax. The concept of value added tax is to tax the value added at each stage of the supply chain eliminating the cascading effect of the earlier tax regime. The implementation of Value added tax hinges on the idea of ‘Input Tax credit’. The buyer of the item in the supply chain gets the tax paid on the item back in the form of ITC when he becomes the supplier and sells that item to the customer. Since, GST is a destination based tax, the end customer is responsible for paying the tax while others like retailers , wholesale dealers should get their tax back. Thus, we can say that Input Tax credit is the heart and soul of the whole GST framework and its free utilization is essential for the success of GST.
GST regime in India is having tough time only because it could not have a standardized shop floor invoicing system in the first place.This was an absolute infrastructural necessity which had to be ensured before introduction of GST. However, the by passing of this step has led to total chaos in verifying whether the ITC buyer is claiming is eligible or not. The current decision of government puts onus on the buyers to ensure that the suppliers should upload the right invoices and it should match with buyer’s invoices if the buyer’s want to get eligible ITC. So, now the buyer not only pays tax but also chases the supplier to upload right invoices. This is a daunting task which only increases the compliance burden on the organizations who pay their rightful dues.
The organizations who are missing on their Input Tax credit have a simple question to ask. The question is why can’t they give tax directly to government rather than giving it to buyer. After all buyer also gives it to government and such a facility is also available in the GST in the form of ‘Reverse Charge Mechanism’. This should make government confident that they are paying their rightful dues and they are not suppose to chase their suppliers.The government may not agree to it as it shall break the whole supply chain on which GST is based.
The solutions to problems of GST lie somewhere else.The first is to introduce e-invoicing system all over India and roll out a modernization plan for businesses in India. In fact, government should have incentivized small businesses to install basic infrastructure like computer and internet and shift to a standard invoicing system. The government has already made an invoicing system but is limiting it to companies having turnover more than 100 crore. It is high time that government recognizes that it is MSME(Micro, small and Medium Enterprises) sector which needs encouragement and this Rs 100 crore floor limit escapes them all.
Secondly, government should reduce the slabs from five to three just like United Kingdom has. It is better to have one standard rate with one or two other slabs to reduce the complexity in the system.The GST experience of the other countries have shown that lesser the slabs of the GST , more is the compliance rate. For example, New Zealand has one single rate of 15 percent and has the best compliance rate. India should also rightsize the number of slabs and adopt a standard rate. GST is a significant development in India’s economic landscape and it is imperative that in our focus to increase tax collection we do not take steps which destroy the basic architecture of GST. It may take some time to do right things but right things reap dividends in the long-term.