Finance ministry concludes that GST credit claims were for credit that firms had accumulated over a period of time and they would not be in a position to utilize it in one go

The massive Rs65,000 crore tax credit claimed by businesses in July while shifting to the goods and services tax (GST) regime is not a cause for worry as it will only be utilized by firms over many months, finance ministry officials said.

The ministry, which looked into the tax credit claims which accounted for two-thirds of the GST collection in the first month of the tax reform, has concluded that the claims were for credit that companies had accumulated over a period of time and they would not be in a position to utilize it in one go.

“Credit for excise duty paid in the earlier regime can only be claimed against central GST (CGST). The accumulated credit is much more than what can be claimed on manufacturing output in one month. There is nothing to be alarmed about,” said a finance ministry official, seeking anonymity.

The ministry had asked taxpayers to calculate their July tax liability after adjusting for tax credits that they wanted to utilize for the month. Experts said the GST receipts of Rs95,000 crore collected by Union and state governments for July may go further up as nearly a third of registered GST payers are yet to file returns and pay taxes.

“To ensure seamless GST credit, businesses registered for GST are asking unregistered vendors to register for GST. This acts as a self policing system and should result in a significant expansion of the tax base,” said Abhishek Jain, partner, indirect taxes, EY. The remaining assessees filing tax returns and paying taxes will also add to the tax revenue, added Jain.

The government is also working on a scheme to enable small traders with annual sales of less than Rs20 lakh—the threshold for GST registration—to register for GST under a simpler voluntary compliance system.

Central Board of Excise and Customs (CBEC), the indirect tax administration of the Union government, has already ordered audit of tax credit claims above Rs1 crore. CBEC had asked field officers to verify the large claims by 20 September, Mint reported on 15 September.

Experts said that unlike the earlier excise and service tax system, GST enables electronic matching of the taxes paid by a material supplier and the tax credit claimed by the buyer, which eliminates chances of fraud and tax evasion. As per this, tax credits claimed by a business will be honoured only if a raw material supplier, who has issued a tax paid invoice, has actually remitted the tax amount to the government.