The government is keeping a watch on some banks, insurance companies and technology and telecom firms after it announced that errors in tax credit claims should be rectified, according to two people aware of the matter.

"There are instances where the transitional credit has jumped by more than 50% from the period before GST (goods and services tax). The government want these companies to return transitional credit either erroneously claimed or inflated," one of the persons said, requesting not to be named. A few companies in FMCG and consumer durables sectors are also under the scanner, the person said.

Tax credit is the amount that can be set off against a taxpayer's liability. When India moved to GST, many companies faced a situation where they had paid tax on old stock and availed credit but had to now set it off against the GST liability. Transitional credits are tax credits accumulated before July 1on pre-GST stock. According to the GST law, the credit can be set off against GST liability.

However, some tax experts pointed out that in several cases the jump in transitional credit could be genuine. "Several businesses are evaluating the transition credits taken and whether there is any need to revise the credits in either direction. Many businesses have rightfully availed large credits, as permitted by the legislation, and it is necessary for them to provide adequate documentation and linkages in order justify that it is appropriate," said MS Mani, partner, Deloitte India.

Under current rules, banks, insurance, telecom and technology companies can now seek tax credit even on capital expenditure — there was no such concept earlier for services — and use that to offset their GST liability.

"Many banks and companies had put their expansion plans on hold until GST was rolled out July 1 to benefit from input credit," said one of the persons quoted earlier. This has resulted in a huge surge in credits claimed by such banks and companies. In many cases — mainly for telecom companies — some machines, technology was already bought before GST was rolled out, but not shipped to India. "Such goods were brought on the balance sheet only after GST, to claim credits," he said.

Legal experts ET spoke with said several companies would want to avoid changing the transitional credit data as it could put them in a tight spot. "If a company revises the transitional credit number, it could be construed as admission of guilt, so most companies may not revise the credit details unless there is a blatant error. The government could issue show-cause notices to companies which may have taken high transitional credit and can levy penalty and interest and seek reversal oftransitional credit," said Abhishek A Rastogi, partner, Khaitan & Co.

According to some officials, who did not wish to be identified, the government is looking to issue show-cause notices by January next year to companies if transitional credit numbers are not revised.

The government has already started raising queries on transitional credits on specific companies. On September 21, ET had reported that the tax department has started questioning some manufacturing companies, banks, insurance and other financial institutions on transitional credit. The tax department had also issued information summons to these companies a month later.

"The government views transitional credit as leakage of tax. The worry in the government is that in the coming months, credits on excise, service tax and VAT would also be given to companies," said a person close to the matter. "The bigger worry is, if states have a shortfall (in their tax collections), the Centre is required to compensate it. All this would happen just before the budget," he said.