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The threat to GST revenue from transitional credit claims
March, 30th 2018

The trend of revenue inflows under the goods and services tax (GST) regime remains unimpressive and erratic. Data shows revenue collection for the month of February stood at Rs85,174 crore, a marginal dip from the previous month (see chart).

Following the reduction of GST rates on numerous goods and services in January, and February being a shorter month, tax experts were expecting this. They foresee an improvement in March on account of sales push by companies to meet their financial year-end targets.

Amid all this, the Central Board of Excise and Customs (CBEC) is trying to remedy the situation by verifying transitional credit tax claims made by certain businesses. It suspects that companies may have taken higher tax credit than they are eligible for, which has adversely impacted revenue collection.

Transitional credit mainly relates to input tax credit of the old regime (service tax, value-added tax or VAT, etc.) that businesses could claim in the GST regime. All registered taxpayers were eligible to claim transitional credit before 27 December, 2017 by filing the TRAN1 return form.

CBEC will be scrutinizing claims of taxpayers who have availed of transitional credit greater than Rs25 lakh and where the closing balance of CENVAT (central VAT) credit between 1 October 2016 and 30 June 2017 had grown by 25%.

The tax department said in a notice that it has listed out 50,000 assessees for the purpose. In fact, the indirect tax department has issued notices to all the major telecom companies, including tower firms, for claiming additional transitional credit for capital expenditure incurred under GST, said a recent report in The Economic Times.

The verification process has been divided into four phases by CBEC starting March and spanning the next fiscal year. “Given the anomaly in CBEC guidelines and GST law with respect to availing transitional credits, businesses are concerned whether or not the transitional credit already taken will be approved by the tax authorities. An impact on their working capital cannot be ruled out if tax credits are disallowed,” said Anita Rastogi, partner (indirect taxes) at PwC India.

If transitional credit already utilized is rejected, then the taxpayer has to repay that money along with interest. “Since these credits have been taken on a one-time basis, its impact on GST revenues collection will be short term. The collection will surge or decline depending upon the quantum of transitional credits approved,” said Rastogi.

Sharing a similar view, M.S. Mani, partner (GST) at Deloitte India, added, “While most businesses would have availed and utilized the transition credits so taken, it may have reduced the GST collections in the initial months, but this is not an issue that is expected to perpetually dent collections.”

However, he cautioned that if the window for taking credits is reopened to facilitate those businesses which were unable to take credits earlier, there could be a possible reduction in collections in future months.

It should be noted that a couple of writ petitions have already been filed by some companies in various high courts requesting a second chance to claim their pending transitional credits. For now, the tax authorities have been directed to allow these assessees to take pending transitional credits.

Simply put, increasing petitions of this nature can force the tax department to reopen the window for claiming pending transitional credits, which will have a bearing on GST collections.

Meanwhile, hopes of boosting revenue collection also rest on the e-way bills, which will be implemented from 1 April. But considering the technological failure taxpayers experienced with the e-way bill portal in February, how successful the move will be in bringing in more money for the government with minimal trade disruption is anybody’s guess.

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