To curb tax evasion by way of fake invoicing, the Central Board of Indirect Taxes and Customs (CBIC) had recently made it mandatory for businesses with monthly taxable supply of more than Rs 50 lakh or Rs 6 crore annually(other than exempt supply and zero rated supply) to pay at least 1% of their GST liability in cash. The new rule restricts use of input tax credit (ITC) for discharging GST liability to 99% effective January 1, 2021.
However the rule provides for the following exceptions (wherein the entire liability can be discharged by utilizing the ITC):
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- the said person or the proprietor or karta or the managing director or any of its two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees, as the case may be, have paid more than Rs 1 lakh as income tax in each of the last two financial years; or
- the registered person has received a refund amount of more than Rs 1 lakh in the preceding financial year on account of unutilised input tax credit on account of zero-rated supplies (exports + SEZ); or
- the registered person has received a refund amount of more than Rs 1 lakh in the preceding financial year on account of unutilised input tax credit on account of inverted rate structure; or
- the registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability, applied cumulatively, upto the said month in the current financial year; or
- the registered person is –
- (i) Government Department; or
- (ii) a Public Sector Undertaking; or
- (iii)a local authority; or
- (iv)a statutory body.
Out of GST taxpayer base of 1.2 crore, only about 4 lakh taxpayers have monthly taxable supply value greater than ₹50 lakh. Of these, only about 1.5 lakh taxpayers pay less than 1% of their GST liability in cash. “When exclusions in the rule are applied, around 1.05 lakh taxpayers get further excluded from these 1.5 lakh taxpayers. Thus, the rule would apply only to 40,000 to 45,000 taxpayers which is only 0.37% of the total businesses registered in the Goods and Services Tax system,” CBIC said.
It would apply only to risky or suspicious dealers who use a lot of fake credit and make no cash tax payment. Dummy companies which generate fake ITC or are used to be a layer in multi-layer fake credit flow pay no tax in cash.
The CBIC has booked about 12,000 cases of ITC fraud and arrested 365 persons in such cases so far. During the last six weeks alone, more than 165 fraudsters have been arrested.
Under the new rule cash payment of 1% is to be calculated on the tax liability in a month and not turnover of the month. For example, if the turnover of taxable supplies of a taxpayer is Rs 1,00,000 in a month and he is required to pay GST of 12% on his output taxable supplies, then he will be required to pay 1% of Rs 12,000 i.e., Rs 120 only in the month through cash under this rule. Therefore, the net requirement of cash payment will be only 0.12 % of the turnover.
The government’s decision on mandatory payment of at least 1 % of GST tax liability in cash will impact only around 40,000 to 45,000 taxpayers but help the entire system curb the menace of fake ITC availment.