Excess tax credit use to spur automatic notices

livemint.com:

Businesses paying off their goods and services tax (GST) liability using tax credits way more than they are eligible for as decided by the indirect tax body’s IT systems will get auto-generated notices seeking explanations, according to a GST Council decision on Tuesday. The move has the potential to boost tax collections as businesses and traders may have to use cash payments where tax credits cannot be used.

It is also likely to force businesses to ensure tax compliance of their raw material and service suppliers so that the taxes paid at the time of purchase of these items get reflected in GST’s IT system as credit available, without delay. Availability of tax credits has been among the long-standing areas of dispute between businesses and the government, as it is directly linked to the compliance of other entities in the supply chain.

Businesses have often complained that they are not able to avail of credit for the taxes paid on purchase of raw materials and services because these suppliers have not paid to the government the indirect tax collected at the time of these supplies. On the other hand, the government is of the view that businesses have to engage with honest suppliers and that it was difficult to give credit to a business for the taxes the exchequer has not received.

Experts said the GST Council’s decision to introduce a way of dealing with differences in the auto-generated GST credit statement of a business and what has been claimed in the monthly tax return showed the intention to improve transparency in doing business, but its implementation could pose challenges. The idea is to ensure compliance by sending system-generated notices to taxpayers asking them to explain excessive tax credit claims if it