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Pending VAT comes to haunt companies claiming input tax credit
November, 15th 2018

State tax authorities have begun blocking input tax credit claims of companies that have any value-added tax (VAT) demand in the erstwhile tax regime pending against them. This has led to some worry in the industry which had hoped that input tax credit settlements in the goods and services tax (GST) regime would be seamless.

Large multinational companies in some states such as Punjab, Maharashtra, Delhi and Uttar Pradesh are facing this issue. “Some state governments have begun issuinpg notices blocking credit,” said a person aware of the development. This is being done even in cases where the VAT claim is disputed, said the person, who spoke on condition of anonymity.

A recent circular by the Haryana government specifying circumstances in which input tax credit can be blocked has sparked concerns that other states might follow suit. Tax experts said if the issue is not addressed immediately, it could lead to enormous litigation and hardship for the industry. The action follows revenue leakage concerns, and there is a growing view in the tax department that many entities may have claimed large input tax credit without commensurate tax payments.

“There have been cases of mismatches in input tax credit claimed by taxpayers and what they were eligible to,” said a government official, explaining the rationale behind the move by state governments. The Haryana circular lays down grounds on which input tax credit can be blocked from the electronic credit ledger of the taxpayer on the GSTN portal. The GSTN has already released an API (application programme interface) for necessary backend application for use by the statutory authorities.

As per the directive credit can be denied if a taxpayer is found to be bogus or fake as a result of any investigation, or a taxpayer is found to be non-functional. It can also be denied if transitional credit is claimed in excess of the lawful entitlement, input tax credit is availed in respect of supplies not used in course or furtherance of business, any ineligible credit claimed or any credit claimed contrary to provisions of GST law identified in pursuance of examination of returns.

“Any unilateral blocking of credit for any reason, without following the due process of law and natural justice, has no basis in the GST statute. Such circulars may augment revenue in the short run but would substantially increase litigation,” said Bipin Sapra, partner, EY. Pratik Jain, national indirect tax leader at PwC said: “There is a process outlined in case of credit wrongly claimed, which entails issuance of a notice and investigation proceedings, before any amount can be recovered.”

He said this guideline seems to be quite generic and while the intention is to safeguard government revenues, given the manner in which it is worded, it can potentially be used as a tool to harass taxpayers. Such extreme step of credit blockage on the GST portal should be adopted only pursuant to any detailed investigation or examination, unless there is a case of a blatant fraud, and not without any concrete grounds, said Jain.

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