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SME businesses operate on a very low margin with limited working capital. Major portion of their procurement will have GST component. Uncertainty of the input tax credit would impact them most. They should get the eligible credit on all genuine transactions (once suppliers upload and buyers accept) without any ambiguity or dependency on the supplier compliances which is beyond their control. In short, buyer ITC is a question worth pondering upon.

Buyer ITC – Proposed Process

The ideal process for taking input tax credit for SMEs is that ‘only suppliers are able to upload tax documents/invoices’, and ‘buyers need to accept them to avail input credit’. If an invoice is not uploaded, OR not accepted by the buyer, no input credit is available. On a missing invoice, buyer will interact with supplier to upload the missing invoices.

Presently SMEs are availing the credit based on self-declaring the summary value, but still the input tax credit will be certain on 100% matching with the invoices uploaded by the supplier.

In the proposed simplified return module as announced by the GST Council, the buyer ITC will be available, after supplier uploads the invoice and buyer accepts / provides deemed acceptance. The input tax credit will be available and there will be no blockage of credit further. The features of the new return format are a win-win situation for both supplier and buyer and for the department. In phase I of the simplified return regime, buyer can upload the missing invoices and avail the provisional credit and in phase II, this option will not be availed, credit is only on uploading of invoice by supplier and acceptance by buyer.

The GSTN during March 2019 has released new simplified return formats, in which input tax credit is as per the GST Council recommendations. However, the document has additional conditions which dilutes the recommendations made by GST Council and same are as follows:

  • Input tax credit is not allowable to the buyer if the supplier has defaulted and not filed the returns for consecutive two tax periods / one quarter
  • It is made mandatory for supplier to upload the missing invoices within two months to confirm the credit
  • Also, the option of missing invoices is not available for quarterly return tax payers even in the first phase

This creates the ambiguity of getting the input tax credit to the buyer, and thus, SME businesses will get impacted most.

Consequences for the SME sector

The hard work done by the department and businesses during the last several months towards making ITC business and government friendly gets contradicted or diluted in the return format announced by GSTN. It is denying the input tax credit to the buyer for non-compliance made by the supplier which is injustice to the buyer even after uploading and acceptance of invoice. Further, verifying the supplier compliance (past two months) is not natural in the course of business. When the input credit is denied / kept on hold, this will be an expenditure to the business and would affect the working capital and profitability of the business. SMEs work on limited capital and its rolling nature is the essence of any business. If this gets blocked, SMEs would get badly hit. Also, it would impact them the most, who work on very low margin or limited working capital and it increases the compliance burden to the SME sector.

Conclusion

SMEs should get credit for genuine business transactions (once supplier uploads and buyer accepts). This will also ensure that SMEs should not be having any uncertainty for getting the confirmed input tax credit still safeguarding revenue to the department. Any additional validation which is not natural during the course of business will add additional burden to the business.

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