The idea that taxes should only be applied on "value addition" is one of the main features of the GST. Moreover, the historical problem of "tax on tax" will be resolved.
As the Goods and Services Tax (GST) enters its seventh year of implementation, it is important to recognize and appreciate the Indian government's tireless efforts in bringing this tax system to a nation that has long maintained complex, multi-tiered indirect tax regulations. In the previous seven years, the Ministry of Finance and the GST Council have released over 300 circulars, focused on trade facilitation, lowering the cost of compliance, and offering relief to taxpayers. This has been a significant duty in bringing in several explanations. This has shown to the international market that India can develop quickly while putting a focus on making the economy easier to conduct business in.
The government has also profited from this strategy, as shown by the notable rise in GST income collections over the last several years.
The requirement that taxes only be paid on "value addition" is one of the main features of the GST. Additionally, the "tax on tax" legacy problem will be resolved. As a consequence, there is no tax on tax at this point in the value chain, meaning that all suppliers must pay tax on the value addition. This leads to a smooth flow of credits. The tax component of the purchases he makes does not affect the provider. This was accomplished by permitting credits on purchases in cases when the supplier is required by the GST statute to remit tax on his output deliveries.
Simplifying the regulations pertaining to taxpayers' input tax credit (ITC) has been a major area of concern for the government and the GST Council throughout the years. For both taxpayers and government officials, the eligibility and availment regulations for the Input Tax Credit have become more crucial. In December 2014, when the Constitution Amendment Bill on GST was introduced in the Lok Sabha, the Finance Minister at the time gave an assurance that "there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders due to the seamless transfer of input tax credit from one state to another in the chain of value addition."
All costs spent in the course of business are eligible for ITC under GST, with the exception of a limited list of costs where it is not. To ascertain what is and is not eligible, this necessitates a thorough reconciliation and review process that must be carried out by the revenue department in conjunction with the taxpayers. ITC is not authorized for costs associated with automobiles, food and drink, car rentals or leases, construction services, works contract services, corporate social responsibility costs, etc. Although they are not creditable, all of these costs are incurred for the business's own objectives. Therefore, it's critical to remember that exceptions should be the exception rather than the rule. The fact that income tax and GST follow distinct procedures makes things more complicated for the taxpayer. Personal costs are not deductible under income tax; nevertheless, all other company expenses are authorized and may be claimed as an acceptable deduction by the taxpayer. The government can think about harmonizing the procedures under the income tax and GST regimes and streamlining the credit system by permitting ITC for all company expenses.
Concerns about ITC have also been raised by sectors like electricity, healthcare, and education that use exempted supply. The majority of the input supplies that these sectors purchase are subject to GST, which raises the cost of procurement even if they are free from it for output supplies. Furthermore, the advantage of the output supply tax exemption is lessened by the additional expense of the input tax. Thus, zero-rating all input suppliers would eliminate the need for procurement taxes for these industries, which would be one method to get around this problem.
Apart from the aforementioned, there are other procedural concerns pertaining to the use of ITC. Based on its representation in GSTR 2B, a form that includes information on inbound supplies of goods and services received from registered suppliers, taxpayers may claim Input Tax Credits (ITC). Businesses use this form because it makes it easier for them to reconcile their purchase ledger with their suppliers. Before claiming the ITC, a thorough follow-up and reconciliation process is necessary. Furthermore, businesses involved in both taxable and exempt supply are subject to ITC reversal procedures, which call for classifying each outlay under a separate bucket (taxable, exempt, or common) prior to performing reversal calculations. These reversal computations must be completed monthly, and then there must be a yearly true up/true down. Failure to comply with this requirement might result in interest and penalties for the taxpayers.
An alternative option for such assessments might be to offer a streamlined procedure for determining the applicable ITC amount. One possible approach is to notify the banking sector of a fixed percentage of the total ITC as the eligible amount. Alternatively, a similar notification could be made of a fixed percentage of the exempted turnover to be reversed as illegible credit, just like in the previous regime.
India has risen sharply in the last few years, moving up 37 spots in only three years, from 100th place in the Ease of Doing Business Index in 2018 to 77th place in 2019 and 63rd place in 2020. Thus, we think that taking such actions and streamlining ITC-related regulations and procedures will contribute to the government's goal of streamlining corporate operations as well as general tax administration and compliance in India.
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