Mains Paper 3: Economy | Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
From UPSC perspective, the following things are important:
Prelims level: Input Tax Credit
Mains level: Problem of tax evasion in GST era
- Concerned over a decline in GST revenues, tax officials are likely to examine the high usage of input tax credit (ITC) to set off tax liability by businesses.
What is Input Tax Credit?
- The meaning of ITC can be easily understood when we take the words ‘input’ and ‘tax credit’.
- Inputs are materials or services that a manufacturer purchase in order to manufacture his product or services which is his output.
- Tax credit means the tax a producer was able to reduce while paying his tax on output.
- Input tax credit means that when a manufacturer pays the tax on his output, he can deduct the tax he previously paid on the input he purchased.
- Here, while paying the tax on his output, he can deduct or take credit for the tax he paid while purchasing inputs.
Why review its usage?
- There are losses incurred in GST Revenues.
- Availing ITC ideally should not result in loss of revenue but there could be possibility of misuse of the provision by unscrupulous businesses by generating fake invoices just to claim tax credit.
- As much as 80 per cent of the total GST liability is being settled by ITC and only 20 per cent is deposited as cash.
- GST revenue has averaged around Rs 96,000 crore per month so far this fiscal and this reflects the cash component being deposited by businesses.
What concerns Revenue Officials: Fake Invoices
- Under the present dispensation, there is no provision for real time matching of ITC claims with the taxes already paid by suppliers of inputs.
- The matching is done on the basis of system generated GSTR-2A, after the credit has been claimed.
- Based on the mismatch highlighted by GSTR-2A and ITC claims, the revenue department sends notices to businesses.
- Currently there is a time gap between ITC claim and matching them with the taxes paid by suppliers.
- Hence there is a possibility of ITC being claimed on the basis of fake invoices.
- Once the new return filing system becomes operational, it would become possible for the department to match the ITC claims and taxes paid on a real time basis.
- The revenue department would now analyse the large number of ITC claims to find out if they are genuine or based on fake invoices and take corrective action.