The indirect tax department has begun blocking input tax credit for the whole supply chain under the GST system if even one of the vendors or suppliers has failed to comply with filing rules, affecting a number of businesses and forcing others to pursue legal action.
The tax department claims that many of these cases include circular trade or other frauds since tax credits aren’t counting, but legal experts argue that broad rejection of tax credits will lead to litigation and worsen companies’ cash flow problems.
Due to Covid-19, many companies say that a tiny number of small suppliers and vendors are unable to fill out documentation or comply with tax credit criteria. Tax sleuths are also preventing a tax credit across the entire supplier chain.
Companies are now attempting to take the Tax to court.
“Rule 86A should be invoked only in rare cases on a very strong reason to believe that the transactions of purchase are not genuine and to protect revenue in case of fly by night operators,” said by one expert. If the tax department suspects that an input tax credit is being used fraudulently, the rule allows it to block the credit. Some of the major corporations in the automobile, real estate, infrastructure, and manufacturing industries have received show-cause notifications in this regard in the previous few weeks.
Input tax credit is goods and service tax (GST) paid on raw materials or purchases that can be used to offset future tax liabilities of a specific type.
A company cannot claim the credit until the supplier has paid GST and uploaded the relevant paperwork, according to the GST framework. During the epidemic, the government granted considerable leniency in the deadlines for filing GST returns.
The tax department’s reluctance to award input tax credits has been attributed by industry watchers to what happened last year when it discovered a number of scams.
After looking into a number of cases around the country, the agency discovered that numerous businesses were engaging in circular trading and claiming bogus input tax credits. Many businesses were discovered to be gaming the system by engaging in circular commerce or just displaying the flow of products from one jurisdiction to another.
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