The new GST return system brings with it a few significant changes in the method of reporting of supplies, with its own set of pros and cons. One such issue is the declaration of the input tax credit, which will be based hereafter, on the relevant suppliers’ reporting of invoices on the common GST portal. Here are some of the issues with regard to vendor compliance under the new return system.
1. What is Section 43A?
The CGST Amendment Act, 2018 inserted Section 43A with the aim of simplifying the return filing process under GST. Here are the highlights of Section 43A and the resulting changes in the return filing system-
- There will be a mechanism made available to the supplier where details of outward supplies made by him are declared on the common portal on the basis of which a recipient can claim ITC.
- An option will be also made available to the recipient of supplies to verify and avail ITC.
- The availability of provisional ITC (i.e. credit in respect of those supplies that are not declared by the supplier in his returns) will be restricted to 20% of the total available ITC (rules governing this provision are yet to be notified).
- In addition, there will be a mechanism for the recovery of any tax amount, which is yet to be prescribed.
2. Is Holding Vendor Payments Justified for Not Filing GST Returns?
On analysis of the new return system, it is observed that the claim of ITC by a recipient of the supply is largely dependent on whether the supplier declares the same and files his return on time. A delay caused by the supplier in this regard could result in an unnecessary and additional output tax liability through no fault of the recipient.
The instinctive reaction of a businessman in such a situation would be to hold his vendor’s payment until he files his return and the credit gets reflected on the common portal. However, this may not be ideal, as some suppliers could be facing a genuine working capital crunch, and he may need his recipient to pay for the supplies in order to be able to make the relevant tax payments to the government. Holding payments could also lead to lawsuits as payments are to be made on the basis of goods/services received, and not on the basis of tax compliances done.
When it comes to suppliers that are small and medium-sized businesses, holding vendor payments will be an expensive option since the Micro, Small and Medium Enterprises Development Act (MSMED), 2006 requires the debtors of such MSMEs to make payments within 45 days, after which such payments made will attract a very high cost of interest. That leaves only the large suppliers against whom such action can be taken. Unless the amount involved is fairly significant, holding such payments may not put enough pressure on large suppliers to file their returns.
Hence, considering the points above, holding vendor payments is not a feasible option in case a supplier does not file his returns.
3. What Are Some of the Alternate Measures Taxpayers Can Take to Ensure That Their Suppliers File Their Returns on Time?
While there is no apparent solution for claiming ITC at the moment, in the event a vendor has not filed his returns, let’s look at some of the other measures that could possibly be taken at various levels:
- Indemnification clause: Prior to making a supply, as part of the supply agreement, a clause can be inserted where the supplier will be required to indemnify the recipient in the event the supplier fails to carry out the necessary compliance requirements, resulting in a loss of credit to the recipient. While this may secure the business entity on paper, practically enforcing such a method involves time and legal costs, which reduces the effectiveness of this particular method. Further, a lot of small business entities like proprietorships and HUFs still carry out their business through oral/implied contracts and may not see the benefit in seeking professional services to draft out such an agreement.
- Boycotting defaulting suppliers: The suppliers who commit such compliance defaults repeatedly could be boycotted – either by restricting their trade or by refusing to deal with them altogether. However, this option could hamper business relationships. Small businesses are usually very reliant on long-existing trade relations and finding an alternate supplier for a critical product might not be very feasible. The large suppliers usually have a robust system in place when it comes to settling dues and paying the required taxes on time. However, small businesses may not prefer to deal with them due to the higher costs involved.
- Compliance software: A software or application can be put in place, containing relevant details for every vendor, which helps with compliance by keeping track of the invoices, showing return-filing status, sending out due-date reminders, etc. This will make it considerably easier for a vendor to keep up with compliance.
- Incentive system: An incentive system for the vendor could be developed where he is encouraged to file his returns on time and pass on the necessary credit. However, this could result in an increased cost to the recipient. Hence, care has to be taken to ensure that the cost of implementing this system does not exceed its benefits.