Indian companies are considering setting aside funds to cover risks arising from rejection of their claims for input tax credit on raw materials

Indian companies fear that input tax credit claimed for GST paid on raw materials may be disputed by tax officials later and are considering setting aside funds to cover risks arising from rejection of their claims.

Experts say there is no guarantee that the input tax credit and transitional credit (accrued under the earlier tax system) claimed by the companies will be approved when it is scrutinized by tax authorities at the end of the fiscal year.

With key features of the goods and services tax (GST)—such as matching of invoices—yet to be implemented, the tax is now based on a self-declaration mechanism. Companies are availing provisional input tax credit until the GST Council brings in the invoice-matching process.

“Since provisional credit has been claimed, companies will have to review and audit credit balances, consider provisioning and make sure credit balances are appropriate, given system matching has not yet been implemented,” said Archit Gupta, chief executive officer at online tax-filing portal Cleartax.

“Also, if returns are not filed by suppliers, it may lead to credit being disallowed at the time of matching, whenever it takes place or when a new return filing procedure is in place,” said Gupta.

Bipin Sapra, a partner at consulting firm EY, said there are a number of areas in which transitional credit is being disputed by the tax authorities, including credit claimed against duties such as the Krishi Kalyan Cess.

“This could be classified as contingent liability by companies. However, companies may not provide for credit that is disallowed due to procedural reasons,” he said.

The Central Board of Excise and Customs, or CBEC, had voiced concerns last year that taxpayers have availed high transitional credit, pegged at around Rs1.5 trillion.

“The GST Council is now designing an annual tax return for 2017-18 that taxpayers have to file by December 2019. That annual return can have a column for settling any outstanding tax credit claims,” said a tax official, who asked not to be named.

An official at lobby group Confederation of Indian Industry said the uncertainty is not new for the Indian industry. “Even in the earlier tax regime, tax credits were denied on audit and inspection,” the official said, adding that the worry should be more for companies that have filed exaggerated credit claims.

To simplify the compliance process under GST, which was implemented from 1 July, the GST Council has put on hold the need to file forms that would have matched the claims of the buyers and suppliers. Instead, taxpayers now only fill a simplified form known as GSTR 3B and get input tax credit without any matching of claims.