Seamless GST credits in India are unachievable despite automation
Obtaining goods and services tax (GST) credits is a substantial challenge for companies operating in India despite attempts to automate claims and digitalise the system.
Taxpayers have been struggling to deal with GST credit claims involving an input service distributor, which refers to a business that is invoiced for the services it receives from other entities within the same group.
One tax director at a multinational enterprise (MNE) said the procedures for cross-charging and accounting for the tax, and availing the corresponding credits are “very complex”.
Taxpayers are saying that there is also little clarity on situations when a vendor issues one invoice, but sends it to both the head office and, for example, a factory. “How and where do you take the credit because you're getting one invoice?” asked the tax director.
India’s GST regime, which was introduced in July 2017, was meant to be a technological revolution to improve tax administration and compliance across the country. However, it has faced numerous difficulties, which have been compounded by constant changes to the rules and differing approaches by the country’s 29 states and seven unions.
Place of supply rules fail for services
India’s place of supply rules are creating a barrier for out-of-state companies trying to obtain credits. These rules were introduced to ensure India’s states captured the tax revenue of goods and services consumed in their jurisdictions.
However, obtaining a GST refund from the state where the recipient resides is still a problem for many companies if they are not registered in that state or the recipient doesn’t have a GST presence in the state where the supplies are consumed.
“Because of the place of supply rules, if you are a business based in Delhi, you won’t get a credit for services that you received in Goa, or in any situation where the place of supply is in that state and not the recipient state,” said Mohan Nusetti, vice president of indirect taxation at Lupin.
“I think that it is unnecessary, although I do understand there might be a political reason why states are trying to preserve some GST in their own state. But I do not think that this distinction of place of supply for different types of services was really needed for purely inter-state services.”
Although place of supply rules make sense for imports and exports, Nusetti said the same is not true inter-state services.
GSTR-2A form causes headaches and concerns
For companies, the difficulty of claiming GST credits from a state where they are not resident was made more strenuous when the GST Council introduced changes to the GSTR-2A form, capping the amount of credits that can be claimed.
Furthermore, taxpayers and recipients of goods or services can only claim credits if the vendor uploads the correct details of the invoices in the GST portal through a GSTR-1 filing. Therefore, if vendors fail to upload accurate invoices on time, the taxpayer will not get the input credit.
Nusetti said companies like Lupin will only be able to claim input tax credits based on the supplier’s returns, putting a huge burden on the tax function to ensure the supplier is filing correctly.
“If I am a big business, but I have small suppliers, then I have to hound each of them to make sure that they take the correct rate and technique, and they file the invoice returns correctly,” said Nusetti. “I don't know if that's the intention, but that's going to be the effect.”
The automated system will eventually become a real-time process, where the supplier declares their sale and then the recipient confirms the purchase to claim a credit, allowing the software to match sales to purchases. Taxpayers warn that this is happening too fast and the measures need to be introduced in phases to ensure taxpayers are aware of the changes and allow them to adapt and comply.
When it comes to vendor invoice matching, the MNE tax director said this is a “good” initiative, but complying with it brings a number of complications.
“We as a company are now thinking of what to do to drive compliance with the vendors – do you withhold their payment?” the tax director said. “We've actually been looking at doing an active help desk with the vendors and saying, ‘you've not uploaded’ and doing that kind of rigorous follow-up.”
According to the tax director, this is a cost that most corporates should now be willing to bear to comply effectively with the GST regime. “I do think that there will be big loss of input credit otherwise, and planning for your working capital will not be easy. For us, we look at it as a working capital, a cash blockage,” they said.
However, Umang Dhingra, India head of tax at GlaxoSmithKline Asia, said taxpayers should not rely solely on the GSTR-2A form for tax credits because corrections may be possible during an audit.
“When I went through the rules, my understanding was that you should have, for example, availed the services, paid for them, and have a valid tax invoice,” Dhingra said.
However, the rules are not clear on how to deal with this in an audit situation if a taxpayer has an invoice and can prove that tax payments were made within the 180-day timeframe.
“Is appearance on the portal a necessary condition for availing the credits?” he asked.
If this is not the necessary condition and the matter is raised during an audit, it is not clear if the assessing officer will say it is the taxpayer’s responsibility to check that the details are accurate on the GSTR9-2A form and then automatically disallow the credit.
Although GST audits are still at an early stage and best practices are still being designed, there are problems emerging.
The MNE tax director noted that the GST administration’s powers to deny input credits have grown considerably since 2017.
“An officer in a jurisdiction can actually block – even electronically – the credit or make it disappear from the electronic ledger – and that's happened in the case of a few corporates,” the MNE tax director warned.
Companies have to ensure they have oversight over all the moving parts of a transaction. Tax executives need to find a structure to examine and claim input tax credits in a way that guarantees compliance and prevents blockages in cash flow. Obstacles still remains, and they are tough ones to resolve.