Ahead of the Goods and Services Tax (GST) Council meeting scheduled for October 7, the industry has requested that the Council allow businesses to use their available input tax credit (ITC) to pay taxes under the reverse charge mechanism (RCM), rather than requiring them to pay the tax in cash first and subsequently claim a credit for the same amount.
Under the standard GST system, the seller collects the tax from the buyer and deposits it with the government. Under RCM, the government places the responsibility for depositing the tax on the buyer or the service recipient.
It is accomplished for specific transactions where collecting tax from the supplier is considered less practical or effective, for instance, when the supplier is located abroad or when the law specifically assigns the liability to the recipient. RCM also applies to certain domestic goods and services.
The industry states that this increases the working capital burden, particularly for businesses that already have significant unutilized Input Tax Credit (ITC) in their credit ledgers. ITC is essentially the GST paid on purchases, which a business can typically adjust against its output tax liability.
Paying GST in cash on RCM transactions has been challenging for many industry players, as it can block working capital and lead to an accumulation of credit. While taxpayers across various industries have encountered this issue since the implementation of GST, the issue has become particularly acute for sectors that undertook significant capital expenditure and subsequently witnessed rate cuts last year under GST 2.0.
These include the FMCG, pharmaceutical, footwear, and automobile sectors. Consequently, the industry has sought permission to settle such liabilities using the balance available in the taxpayer’s electronic credit ledger.
Implementing this across all situations will significantly benefit the entire industry and help unlock capital tied up in accumulated credits.
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Ever since the service tax regime, there has been a demand to utilise accumulated credit to discharge reverse charge liabilities. This is a major concern, particularly for businesses facing an ‘inverted-duty’ structure, as they are required to make cash payments of 18 per cent on the import of services while holding accumulated credit that they are unable to utilise. They demand that either the use of credit be permitted for the payment of such liabilities, or the rate be reduced on such reverse charge supplies where the inversion is structural in nature.
Furthermore, according to them, the government should continue to consider additional measures that help the industry utilize accumulated GST credits, thereby enabling it to contribute more to the economy. This would be a practical and meaningful step towards making GST a truly simple and revenue-neutral tax.
News Source: www.business-standard.com
