In many instances, supplies to government agencies go unpaid for months with no effective way to resolve the issue legally. The problem with time limits is a practical one and doesn’t necessarily need a court’s interpretation.
Last month, the monthly GST collection hit a record high, surpassing Rs 2 lakh crore for the first time. However, while there’s a lot of focus on collecting taxes, we shouldn’t overlook the persistent problems and glitches in how GST laws are put into practice. One major issue is what we’ll call the “time-limit puzzle” when it comes to claiming input tax credit.
The idea behind the one nation, one tax concept is to combine various central and state indirect taxes, allowing businesses to get credit for the tax they paid on all their inputs. This credit prevents the problem of being taxed multiple times on the same thing.
Here’s a simple example to show the problem that needs fixing urgently: Let’s say a manufacturer owes Rs 1,00,000 in taxes every month. When making their final product, they’ve already paid Rs 60,000 in GST on the inputs they used. After taking credit for this amount, they still have to pay Rs 40,000 in cash when filing their monthly return, known as GSTR-3B. But like many others, this manufacturer is short on cash because their clients haven’t paid them yet. They only have Rs 10,000, leaving them with Rs 30,000 in unpaid taxes for the month. Now, here’s where the problem starts: The GST portal won’t accept their monthly return until they’ve paid the entire tax amount. If they face a similar cash shortage the next month, they won’t be able to file a return for that month either. In fact, they can’t file any monthly returns until they’ve filed the previous month’s return.
Written by Arvind P Datar, K Vaitheeswaran +1 More
Updated: May 18, 2024 12:02 IST
The monthly GST collection reached a record high last month, surpassing Rs 2 lakh crore for the first time. However, amidst the focus on collecting taxes, we must not overlook the ongoing challenges in implementing GST laws. One major issue is the difficulty in claiming input tax credit within a time limit.
The idea behind GST is to merge various central and state taxes, allowing businesses to get credit for the tax paid on all their inputs. This prevents being taxed multiple times on the same thing.
Here’s a simple example to illustrate the problem: A manufacturer owes Rs 1,00,000 in taxes every month. After paying Rs 60,000 in GST on the inputs used, they must pay the remaining Rs 40,000 in cash when filing their monthly return. However, if they face a cash crunch due to unpaid dues from clients, they may not be able to pay the full amount on time. As a result, they cannot file their monthly return until the entire tax is paid. This creates a cycle where they may struggle to file returns each month.
The time limit for claiming input tax credit is November 30 of each year. If a manufacturer cannot pay the balance tax by then, they lose the benefit of the input tax credit. In the example above, they would lose the credit of Rs 60,000 already paid. This creates unnecessary tax liabilities.
While taxes cannot remain due indefinitely, it’s unfair to refuse credit for tax already paid on inputs used in manufacturing final products, especially when the law allows interest on delayed payments.
The GST portal needs urgent changes to allow monthly returns even if the full tax hasn’t been paid. The portal could record the tax arrears for that month. For example, if there’s a shortfall of Rs 30,000, the monthly return could be accepted with a note about the shortfall. Interest would have to be paid on the dues until they’re cleared. This would allow the manufacturer to still claim credit for the inputs on which tax has been paid.
It’s well-known that many small and medium enterprises don’t receive payments within the 45-day limit set by the Micro, Small and Medium Enterprises Development Act, 2006. Additionally, supplies made to government agencies often go unpaid for months without any effective legal solution. The time-limit problem is a practical issue that doesn’t need a judicial interpretation to be addressed.
Let’s simplify this:
Imagine you’re supposed to pay income tax based on what you’ve earned after deducting expenses. If you can’t pay it on time, it wouldn’t be fair to make you pay tax on all your earnings and not allow you to deduct your expenses. The law should only enforce interest and penalties for late payments, not deny your right to claim deductions.
Similarly, when a manufacturer buys materials on which they’ve already paid taxes, they should have the right to claim a credit for those taxes, even if they can’t pay the remaining taxes in cash immediately. Denying this right only makes things harder for struggling taxpayers, pushing them into deeper trouble.
Thousands of taxpayers are affected by the rule that won’t accept returns until all taxes are paid for each month. The GST portal needs to be changed so that it accepts all returns, with any outstanding taxes incurring interest. The law could require clearing tax debts by November each year, with stricter penalties for those who don’t comply.
The GST Council should act quickly to fix this monthly problem, especially since most taxpayers facing difficulties aren’t doing so intentionally but because of tough business conditions beyond their control. Until the GST Portal allows monthly returns even with unpaid taxes, the November 30 deadline for claiming tax credits should be put on hold.