GST Officials: Lower threshold for e-invoices will address GST ITC issues

GST ITC Issues: Gradual reduction in the annual turnover threshold for mandatory e-invoicing for business-to-business supplies may help large firms fully claim their input tax credit (ITC), which often gets stuck due to delay or failure in filing goods and service tax (GST) returns by MSMEs.

It will also provide MSMEs to be tech savvy, which may help them retain or get orders from larger corporates, say officials.

To tighten anti-evasion measures, the government last week announced that GST e-invoicing will be mandatory for firms with a turnover of more than Rs 10 crore from October 1 compared with Rs 20 crore at present, bringing in 0.36 million additional firms under the digital reporting framework.

“By making the threshold Rs 10 crore, suppliers for large firms will almost universally get covered. So, the entire value chain of large taxpayers will be on the digital system,” a senior tax official said. It will have a positive impact on utilisation of full ITC and on compliance by businesses, the official said.

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Analysts reckon that the biggest challenge is availing full ITC if large companies are dealing with MSME suppliers, many of whom are unable to hire professionals to deal with compliance issues.

After GST was rolled out in July 2017, all taxpayers claimed ITC on a self-declaration basis. In October 2019, the concept of provisional ITC was introduced, allowing businesses to claim only 20% ITC as provisional (largely covering non-compliant vendors) from the eligible ITC reflected in their GSTR-2A statement on the inward supplies. This limit was reduced to 10% in 2020, and from January 1, 2021, further to 5% of the eligible ITC reflected in the GSTR-2B.

From January 1, businesses cannot avail full ITC if any vendor fails to upload invoices to the GST portal as the government has tightened the norms to check fraud.

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This provision has forced companies to source inputs — from office stationery to automobile components — from larger firms, leaving many MSME suppliers in the lurch.

“We could do a study of the automobile industry to see how much unreported credit is in the system and accordingly address any such issue,” the official said.

Around 0.65 million businesses with turnover between Rs 5 crore and Rs 10 crore will be brought under the e-invoice net from early next year. Thereafter, the threshold may be further lowered below Rs 5 crore in a way that will ensure that business-to-consumers or those businesses exempt from filing returns are not covered, since tax revenue potential will not be that much. There are about eight to nine million businesses with annual turnover below Rs 5 crore.

Analysts reckon that a scheme me be designed to reward MSME taxpayers if they fully comply with return filing and GST payment, to compensate them partly for their expenses on compliance.