The tax department has triggered a particular section— section 86A — to block the credit for a year under the Goods and Services Tax (GST) framework. Input tax credits are essentially part of the tax paid by a company that can be used to set off future tax liability.
People in the know say that the tax department’s investigations revealed that several companies were allegedly manipulating the input tax credit mechanism.
Blocking of the tax credits comes after the revenue department started arresting promoters for allegedly claiming tax credits through fake invoices and escaping GST. The dispute over the taxman’s power to arrest promoters of companies and attach their bank accounts over suspected evasion of goods and services tax was challenged in courts.
“Interestingly, both section 69 related to power of arrest and rule 86A related to blocking credits taken fraudulently are based on ‘reason to believe’. It is important that the authorities prudently invoke rule 86A to protect the loss of revenue. It is equally important that arrest provisions are not invoked after invoking rule 86A” said Abhishek A Rastogi, partner at Khaitan & Co.
The tax department is investigating several cases where it suspects that companies supplied goods without an invoice or indulged in “circular trading” to avoid paying GST.
Industry trackers say that in several instances the companies are not issued notices and they only come to know that their tax credit is blocked when they go on to the portal to pay future taxes.
“While blocking of input tax credits would be justified in cases of gross violation of the GST provisions and fraudulent availment of credits, it is essential that businesses be given an opportunity to present their views before any action is taken to block the input tax credits,” said MS Mani, partner, Deloitte India. “The views expressed by businesses need to be taken into consideration and an extreme action such as blocking on input tax credits, which significantly increases the working capital requirements and imposes a financial cost on business, should be avoided in most of the cases, unless a deliberate mala-fide intent is proven.”
Blocking of the tax credits comes days after the government announced that it has crossed the revenue collection threshold of Rs 1 lakh crore, first time in the last eight months. Many companies are claiming that their credit is blocked only because of some minor mismatch in invoices.
Blocking the credit for a year essentially means that the government would continue to increase its GST collection. As per the GST framework, in cases where companies are unable to claim credit, they have to cough up the tax and pay up front. This affects their cash flows.
Experts, however, said that there are several instances where individuals and companies are using the GST system to manipulate and benefit. Like in a recent case, a 25-year-old student of chartered accountancy (CA) was arrested by the tax officials for committing a fraud to the tune of Rs 50.24 crore through input tax credit manipulation, TOI reported on October 22.
Despite this, experts say that the investigations have to be concluded as early as possible. The tax department has a right to block the credit for a year under the current section.
“While blocking of credits will enhance revenue collection, wrongful blocking will create hardship for businesses and action in wrong cases can be challenged in court as credit is a vested right,” added Rastogi.