Quarterly goods and services tax (GST) return filing for small businesses is turning out to be a double-edged sword.
A key relaxation in compliance for micro, small and medium enterprises (MSMEs) is leading to blockage of input credit tax and cash flow issues for large companies that have to file monthly GST returns, prompting them to change suppliers.
Payments to smaller companies which have annual turnover of up to 5 crore and file returns on a quarterly basis are also getting delayed by large companies owing to reconciliation issues cropping up in GST returns, said people aware of the matter.
“The purchaser can typically claim the input credit on a quarterly basis even though the invoice is paid (including GST) earlier… this leads to cash flow issues for the purchaser,” said Pratik Jain, tax partner at PwC India.
This has prompted bigger companies to change suppliers, said industry executives. Industry has flagged the issue to the government, they said.
“Large buyers tend to shirk suppliers filing quarterly returns due to delays in reconciliation of accounts… several small-scale suppliers are afraid that large companies may not continue supply contracts,” said Anil Bhardwaj, secretary general at the Federation of Indian Micro and Small & Medium Enterprises.
However, smaller companies have started to find ways around the problem, he said.
Entities with turnover of up to 1.5 crore have been allowed to file quarterly returns and the facility will be available to those with turnover of up to Rs 5 crore from 2021.
The change was made by inserting Rule 36 (4) in the GST rules from October last year, specifying that input tax credit to be availed by a taxpayer in respect of invoices or debit notes which have not been uploaded by the suppliers in GSTR-1 return shall not exceed 10% of the eligible ITC available. Most of the MSME ..
Small businesses act as a feeder to large conglomerates, and due to the operation of online tax credit matching, such large enterprises face a lot of hassles in monthly reconciliation. Therefore, many businesses have stopped on-boarding vendors who file quarterly tax returns, said Rajat Mohan, senior partner at AMRG Associates.
FISME’s Bhardwaj said some of the smaller firms had begun filing monthly returns to mitigate credit blockage and reconciliation issues for larger companies, ensuring smoother payments.
“GSTN has also stabilised and thanks to intermediary companies filing is not as cumbersome as it used to be initially,” he said.
Tax experts said the government should look at correcting the anomaly. “Allow the purchaser to claim input credit on a monthly basis and apply the 10% rule (wherein the credit is limited to 110% of the amount reflected on the portal) on a quarterly basis with respect to purchases from smaller vendors,” said PwC’s Jain.
This may need changes in the GSTN system, though, he said.
“As done during Covid, the government may consider relaxing the restrictions under Rule 36(4), and allowing provisional credits to all with quarterly or half yearly application of Rule 36(4), so that it takes care of mismatch in the monthly vs quarterly filings,” said Harpreet Singh, indirect tax partner at KPMG India.