The seizure of over Rs 170 crore from a perfume maker in Uttar Pradesh has put a spotlight on GST frauds, but come January 1, a big loophole exploited by fraudsters will be plugged. 

The government is set to do away with 'provisional ITC' measures from January 1 along with a host of tax rate and procedural changes.

While the measure to withdraw the leeway of provisional ITC would prevent frauds, it is set to hit small businesses, which fall short on compliance matters.

Under the current rules, businesses can claim 5% of their total eligible ITC as ‘provisional’ ITC even if these are not matched with supplier invoices. However, the companies would not be able to do it from January 1. The 5% provisional ITC gave a cushion to small businesses which found it difficult to meet compliance as big corporates would still source from them. With the provision gone, experts say, corporates would prefer to deal with bigger firms where compliance was in place to avail tax credit.

The central tax authorities have booked about 8,000 cases involving fake ITC availment of over Rs 35,000 crore in FY21 with misuse of the beneficial provision of ITC being the most common way for GST evasion. 

The provisional ITC was introduced in 2019 when businesses were allowed to claim only 20% ITC as provisional, which was reduced to 10 per cent in 2020 and to further 5 per cent in 2021. However, from January 1, 2021, this limit was reduced further to 5% of the eligible ITC.

Parag Mehta, Partner, NA Shah & Associates stressed that the new input tax credit provision means that the flexibility of 5 per cent variance which was currently allowed won’t be available after the new rule comes into place. “Hence the assesses will have to ensure a very strict review of vendor compliances,” he said. “Another issue is what happens to invoices issued by vendors prior to January 2022. “In my view, the eligibility of the same will be covered under existing provisions,” he told ETCFO earlier.

Plugging other loopholes

The procedural changes that would come into effect include e-commerce operators, such as Swiggy and Zomato, being made liable to collect and deposit GST with the government on restaurant services supplied through them from January 1. They would also be required to issue invoices in respect of such services.

There would be no extra tax burden on the end consumer as currently restaurants are collecting and depositing GST. Only, the compliance of deposit and invoice raising has now been shifted to food delivery platforms.

The move comes after government estimates showed that tax loss to the exchequer due to alleged underreporting by food delivery aggregators is Rs 2,000 over the past two years.

Making these platforms liable for GST deposit would curb tax evasion.

The other anti-evasion measures which would come into effect from the new year include mandatory Aadhaar authentication for claiming GST refund, blocking of the facility of GSTR-1 filing in cases where the business has not paid taxes and filed GSTR-3B in the immediate previous month.

Currently, the law restricts the filing of return for outward supplies or GSTR-1 in case a business fails to file GSTR-3B of the preceding two months.

While businesses file GSTR-1 of a particular month by the 11th day of the subsequent month, GSTR-3B, through which businesses pay taxes, is filed in a staggered manner between 20th-24th day of the succeeding month.

Also, the GST law has been amended to allow GST officers to visit premises to recover tax dues without any prior show-cause notice, in cases where taxes paid in GSTR-3B is lower based on suppressed sales volume, as compared to supply details given in GSTR-1. But experts find this provisions very harsh. 

"In case of mismatch in GSTR 1 and GSTR-3B, the gst authorities can enter premise .. In case of mismatch in GSTR 1 and GSTR-3B, the gst authorities can enter premise .. of alleged defaulter demanding the tax without giving any notice. This is a draconian provision and has given immense power to authorities. Discre .. powers may lead to abuse of power and harassment," said Smita Singh, Partner- Indirect Tax, Customs & Trade at S&A Law Offices

The move would help curb the menace of fake billing whereby sellers would show higher sales in GSTR-1 to enable purchasers to claim ITC, but report suppressed sales in GSTR-3B to lower GST liability.