The newly-launched GST return system has brought about some major amendments in the method of reporting of supplies; however, it has its own advantages and disadvantages. One such challenge is the declaration process of the input tax credit (ITC), which would now be based on the fact that the relevant suppliers report their invoices on the GST portal. Listed below are some of the challenges related to vendor compliance that the new return system entails.
1. Section 43A explained
The CGST Amendment Act, 2018 introduced Section 43A for easing
out the return filing process under GST. Following are its highlights and the subsequent
changes in the return filing system:
- The supplier has access to a mechanism where he could declare the details of outward supplies made by him on the common portal and then on the basis of that, a recipient could claim ITC.
- The recipient of supplies also has an option to verify and avail ITC.
- The accessibility of provisional ITC (that is, the credit related to the undeclared supplies by the supplier in his returns) is limited to 20% of the total available ITC (the guidelines governing this provision are still to be notified).
- Additionally, there would be a procedure for the recovery of any tax amount, which is yet to be recommended.
2. Is it justifiable to
stop vendor payments if you are not filing GST returns?
While analysing the new return system, it is seen that the
ITC claim by a supply’s recipient majorly relies on whether the supplier has
declared the same and has filed his return within time limit. If the supplier
delays this, then it could end up in an extra output tax liability though it’s
not the recipient’s fault.
The natural reaction of an entrepreneur in such a scenario
would be to stop vendor payments till he files his return and he can see the
credit reflecting on the common portal. But, this is not the ideal thing, as
some suppliers might be going through a genuine working capital problem, and he
might want his recipient to pay for the supplies so that he could pay the
relevant taxes to the government. Stopping payments could also result in
lawsuits as payments have to be made depending on goods or services received,
and not as per the tax compliances done.
For small and med-sized supplier businesses, stopping
vendor payments would be an expensive alternative as the Micro, Small and
Medium Enterprises Development Act (MSMED), 2006 mandates the debtors of these
MSMEs to clear payments within 45 days, post which these payments made would invite
a very high cost of interest. Then only the large suppliers are left against
whom these kind of actions can be taken. Unless the amount involved is quite
big, stopping such payments would not put adequate pressure on large suppliers for
filing their returns.
Thus, considering the above-mentioned points, stopping
vendor payments is not a viable option if a supplier has not filed his returns.
3. Which alternate measures
can taxpayers take to make sure that their suppliers are filing returns on time?
Though there is no clear solution for claiming ITC right
now, but if a vendor has not filed his returns, here are some measures that can
- Indemnification clause: As part of the supply agreement, before making a supply, a clause can be added where the supplier has to indemnify the recipient in case the supplier fails to fulfil the required compliance needs, thus causing a loss of credit to the recipient. Though this may secure the company on paper, enforcing such a method practically involves a lot of time and legal costs, which decreases the effectiveness of this particular method. Also, many small businesses such as proprietorships and HUFs still conduct their business through verbal or implied contracts and might not see the advantage in employing professional services for drafting such an agreement.
- Boycotting such defaulting suppliers: The suppliers who do such compliance defaults frequently can be boycotted – either by limiting their trade or by declining to collaborate with them altogether. But, this could spoil business relationships. Mostly, small businesses are very dependent on long-existent business relations and looking for a new supplier for an important product may not be very practical. However, large suppliers mostly have a structured system for settling past dues and making payments for the required taxes on time. But, small businesses might not want to deal with them because of high costs involved.
- Compliance software: An application or software can be put in place, comprising applicable details for each vendor, which assists with compliance as it keeps track of the invoices, shows return-filing status, sends due-date reminders, etc. This makes it substantially easier for a vendor to maintain compliance.
- Incentive system: An incentive system especially meant for vendors can be developed where they are encouraged to file timely returns and pass on the necessary credit. But, this could mean an increased cost for the recipient. Therefore, care should be taken to make sure that the cost of execution this system doesn’t exceed its advantages.