Companies facing cash crunch may have to reverse GST credit on delayed payments to vendors : 23-06-2020

Companies which have postponed vendor payments due to a liquidity crunch brought on by the Covid-19 crisis will have to face further working capital woes due to credit reversal with interest under the goods and services tax framework, in case they don’t clear the dues within 180 days of the date of invoice.

These cash-strapped companies will have to either make payments within 180 days or reverse the tax credit they have availed of. They will also have to pay interest at 18% to the government from the date the credit was taken.

“While this provision may be a blessing in disguise for vendors as it indirectly encourages timely payment of consideration to vendors, it has opened up a can of worms for businesses during this pandemic. The larger worry for businesses has been on possible interest implications with delayed payment of consideration, including it applying for the retrospective period (from the date of availing of the credit) when such a pandemic and cash crunch was not even anticipated by businesses” EY India tax partner Abhishek Jain said.

In many cases, say people in the know, companies have issued cheques and even shown this as payment completed in their books of accounts, so that they could avail of GST credit.

However, as the 180-day deadline comes near, many of these companies facing a liquidity squeeze are realising that they may not be able to make the payments.

Tax experts said as per the current regulations, if the vendors don’t pay GST, companies cannot avail of credit.

This has led to a trend where companies hold on to payments till the time vendors show proof that they have paid the GST. This too is now coming to haunt them.

“Making businesses responsible for the GST compliance of their vendors makes it very challenging for them as they have little or no control over the vendors’ tax matters. While the need to reconcile the GST credits with the GST payments by vendors is accepted, it should be done in a manner that does not add to the burdens of businesses that need to focus on business continuance and revival strategies,” said MS Mani, a partner at Deloitte India.

Many vendors have also reached out to the government as they expect high bad debts or delayed payments. They complain that in such a scenario, it’s a double blow for them as they have already paid GST but never received the money.

“Companies have approached the government for an option of delayed tax payment based on receipts rather than raising an invoice. The reversal of credits at the end of vendors due to non-payment in six months should have a corresponding provision of taking credit by the supplier at the end of this six months,” said Abhishek A Rastogi, a partner at Khaitan & Co.

Industry trackers said in many cases, vendors and companies would treat the money they were required to pay to the government as working capital.

“They wouldn’t pay GST till the ultimate deadline. The Covid-19 pandemic and the pressure on their cash flows meant that in many cases there were defaults and companies and vendors were unable to pay GST and claim credits,” said a person in the know.

Legal experts said this issue could even be litigated in absence of any clarity from the government.

“There is actually an anomaly and arbitrariness which may be tested in courts in case the problem is not resolved,” said Rastogi.

Source : Times of India

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