Page 45 - Banking Finance August 2023

FEATURES

GST deserves due credit

n July 1, 2017, the Goods and Services Tax (GST) meet short term liabilities, then enterprises are forced to sell
O chapter in the history of indirect taxation and we erm liabilities, eventually leading to insolvency.
law was introduced and there began a new
longterm assets (like land, machinery, etc.) to meet shortt
are celebrating its sixth anniversary this year.
Thus, taxcredits under GST and benefits under the Insolvency
GST was aimed at resolving issues created by multiplicity of and Bankruptcy Code (IBC), 2016 are complementary to each
indirect taxes, resulting in a complex tax structure, high other, as both augment ease of entry and exit of firms in a
incidence of taxes and loss of tax credits in supply chain. This market economy. However, businesses also need to be aware
was creating issues like higher compliance cost, uneven tax of the restrictions in the ITC scheme — that is, the goods or
rates, broken tax credit chain and unfair competition due to services and the situations, where ITC is not allowed.
geographical location. Thus GST, a unified tax structure, was
The GST or VAT system is being followed in 175 countries, after
created, which is legislated and administered concurrently by
its first introduction in France in 1954. The basic tenet of VAT
the Central and State governments.
or GST, across the globe, is taxation of only value addition,
Under earlier tax regimes, the credit of many taxes/levies paid therefore, all these countries follow the ITC mechanism.
by the suppliers was not available to them and this was not Though the basic concept is same, there are some variations
only increasing the final cost but was also blocking the working in procedures or restrictions under the laws of different
capital. However, this issue has been addressed by the countries.
introduction of Input Tax Credit (ITC). Moreover, refund of
Issues and Concerns
GST paid on export of goods is now fully automated, whereby
In comparison to legal provisions under a similar scheme in
the shipping bill filed by the exporter is also treated as an
the Central Excise Act, the legal provisions under GST law are
application and the refund is directly credited to exporter’s
more intricate. Like any other beneficial scheme, the ITC is
bank account.
also subject to certain conditions — example, supplier must
The most important aspect of GST was introduction of an
have deposited the tax with government, claim must be made
uniform and unbroken chain of ITC. This effectively reduces
within specified timelimit, goods/services should have been
tax liability to the extent of taxes paid on purchases and
received along with invoice, etc.
results in taxation of only value addition by the supplier,
Besides, ITC is not allowed on some goods or services, even
thereby avoiding cascading effect of tax on supplies.
though the same are used for business purposes — example,
This results in substantial tax savings and helps in reducing
motor vehicles, goods/services used for immoveable property,
the requirement of working capital, ranging from 5 per cent
etc. These issues have raised many concerns and contested
to 28 per cent — depending on inputs and input services
between the government and taxpayers. Some major
procured. Besides, there are also provisions for cash refund
decisions on the same are presented.
of ITC in two situations, where the tax on output cannot be
As the GST regime enters its seventh year of implementation,
setoff against the taxes on input. This is when the former is
the law is continuously evolving to acquire a robust
zero rated or the tax is less than the input tax. Exports/supplies
structure to address the issues faced by taxpayers, while
to SEZs are zero rated. The accumulated tax credit in such
increasing the beneficial provisions for the trade. It is,
cases is refunded into the bank account of the producer.
therefore, important for Indian businesses to keep an eye on
Such tax credits add to short term assets of a business entity, new amendments to the GST law and leverage various
which in turn helps to meet short term liabilities. This is benefits, to become globally competitive and market leaders
important because when short term assets are insufficient to in their field of activity. (Source: Business LIne)
BANKING FINANCE | AUGUST | 2023 | 45