The Central Board of Indirect Taxes and Customs (CBIC) recently established a mandatory rule for businesses exceeding a monthly turnover of Rs. 50 lakh. Effective from 1st January 2021, these businesses will now be required to pay at least 1% of their Goods and Services Tax (GST) liability in cash.
Understanding the New Rule
The new directive from CBIC implies a restriction on the use of Input Tax Credit (ITC) for reducing GST liability to 99%. ITC is designed to offset tax paid on the purchase of raw materials, consumables, goods or services used in production, preventing double taxation and minimizing cascading tax effects.
With this new regulation, CBIC has so far been able to book about 12,000 cases of ITC fraud and arrest around 365 individuals implicated in such cases. This move aims to prevent tax evasion typically carried out through fake invoicing.
Exceptions to the Rule
However, this restriction will not apply in certain scenarios: notably when the managing director or any partner has paid more than Rs. 1 lakh as income tax, or when the registered person has received a refund amount of more than Rs. 1 lakh in the previous financial year due to unutilised ITC.
Impact on the Business Community
This rule will impact only a small fraction of businesses registered in the GST system, specifically 0.37% of the total. The total GST taxpayer base consists of 1.2 crore entities, among which only around 4 lakh have a monthly supply value greater than Rs. 50 lakh.
From these, only approximately 1.5 lakh pay less than 1% of their GST liability in cash. After applying the exclusions laid out in the rule, around 1.05 lakh taxpayers are further excluded, thereby leaving only 40,000 to 45,000 taxpayers affected by this rule.
Concerns and Criticisms
Despite targeting a minor section of businesses, the rule has already sparked concerns that it may negatively impact small businesses by increasing their working capital requirement and complicating the already intricate GST system.
The Government’s Stand
In response to these concerns, the Department of Revenue has asserted that they are unfounded. They argue that only “risky or suspicious dealers and fly-by-night operators” will be affected by this move.
The government has stated that this rule was established after careful deliberations in the GST Council’s Law Committee. The objective behind it is to identify and control fraudsters involved in fake invoices and unjustified use of input tax credits.
About Central Board of Indirect Taxes and Customs (CBIC)
The CBIC is an integral part of the Department of Revenue under the Ministry of Finance. It was rechristened from the Central Board of Excise and Customs (CBEC) in 2018 following the roll-out of the GST.
It’s fundamentally responsible for formulating policies concerning the levy and collection of customs, central excise duties, Central GST (CGST), and Integrated GST (IGST).