India's GST credits and audits concerns companies

The significant amounts of working capital that are being held up by GST credits and the impending audits in India are causing tax directors concern.

Tax experts worry that having significant capital invested in Indian goods and services tax credits could hurt businesses at a time when those businesses may be subject to audits.

Following the beginning of the first GST audit cycle by federal and state tax authorities since the implementation of GST in 2017, concerns have been raised. In order to give businesses time to implement the regulatory changes and because of the COVID-19 pandemic, audits had, until now, largely been put on hold.

According to Flipkart's group head of tax, Pramod Jain, businesses are worried about the impending GST audits and the sizeable sums of money that are invested in GST credits across the nation.

Now the question is how to unblock it, he says.

In the event of a global economic downturn, Jain estimates that it could take two to three years for these credits to be released while businesses try to function without critical funding. He continues, "I would say a good eight to 10% of a company’s turnover could be blocked in these credits."

The current deadlock, according to Mohan Nusetti, senior vice president and head of indirect tax at Mumbai-based Lupin India, a multinational pharmaceutical company, was brought on by a combination of legal adjustments and new authority granted to tax authorities to deny credits on the GST portal.

"While instructions have been issued by the government that in no cases should such credits be blocked beyond a period of one year, there are cases where credits continue to be held up beyond a year, thereby putting pressure on [companies’] working capital," claims Nusetti.

Technical glitches with the GST portal and administrative problems with blocked credits led to long wait times when requesting or accessing credits as well as improper taxpayer credit reflectivity.

Legal challenges have resulted from this, including one on July 22 from the Indian Supreme Court that allows for claims going all the way back to 2017, when credits were transferred to the new GST mechanism.

The Central Board of Excise and Customs and individual state tax authorities' classification of transactions and distribution of taxes are the primary causes of problems with the GST credits.

With the exception of gold and gold jewelry, which are taxed at a lower rate of 3 percent, India has a four-tier GST rate system with rates of 5 percent, 12 percent, 18 percent, and 28 percent.

The problem, according to Rajeev Talwar, a partner at R Talwar and Associates, a New Delhi-based strategic tax advisory firm, is caused by government tax regulations that demand input taxes to match the figures on the GST portal.

Because of the need to pay any tax shortfalls from their own funds, businesses with misaligned production and sales cycles accumulate GST credits with tax authorities.

Another typical scenario is when a business's suppliers have inconsistent GST filing cycles, which frequently forces the primary business to cover any GST shortfall from its own balance sheet. Once more, this causes companies to have funds held in escrow by tax authorities until they can recoup the input GST to make up the difference.

The majority of businesses in India, including those involved in e-commerce, manufacturing, seasonal sales, R&D, and businesses that use raw materials as inputs, appear to be impacted by this problem.

Companies have no discretion when it comes to applying the rules governing GST credit, according to Talwar. "If a business finds they have claimed more tax than they’ve reported then it immediately triggers an alert from the tax authorities, which means a lot of administration, reconciliations and potential litigation."

He claims that strict and rigid rules have resulted from a lack of trust between tax authorities and businesses.

In addition, it has made businesses less eager to recover more credit than is disclosed in their GST filings, even though they are owed money, out of concern for engaging in protracted legal battles with tax authorities.

The impending GST audits are another issue that worries businesses.

Since the introduction of the GST in 2017, the federal and state authorities will conduct the audits for the first time this year.

Due to the COVID-19 pandemic and the GST implementation period, the tax authorities had previously avoided them.

Some businesses are now wary of the possibility of these audits and any potential discrepancies in how taxpayers and the tax authorities interpret the law.

"I think the biggest worry right now is the GST audits that are now starting. e are sure that there will be a lot of surprises and differences of interpretation [of the regulations]," says Jain. 

Since this is the first audit carried out in accordance with the new regulations, Vikas Garg, director and head of indirect tax at Siemens India, hopes the tax authorities will be accommodating and open about the audit process.

"It’s a kind of learning phase for everyone involved, including taxpayers and tax authorities," according to Garg.

Due to India's dual GST system, audits can be conducted by both the federal and state tax offices at the same time.

Tax administrators should be adaptable enough to recognize that mistakes will happen, that nothing will ever be perfect, and that different people will interpret the law [on taxes] differently, according to Garg.

According to him, not all disagreements between taxpayers and authorities should be viewed as instances of tax evasion or grounds for legal action. Instead, they should be taken into account appropriately and in light of how important they are to government revenue.

Tax authorities would do well to try to reduce red tape that prevents businesses from obtaining crucial GST credits as long as businesses continue to face challenging trading conditions.

It is encouraging that the Indian government is paying attention to the concerns voiced by businesses, but it also needs to offer some relief to those companies who suffer because a significant portion of their working capital is locked up in government funds.

By fLEXI tEAM