The substantial liability of the purchaser to prove the genuineness of each transaction
The unavailability of credit for construction services, even when they are in furtherance of business.
Refusal to grant ITC for CSR activities, despite the fact that it is required by law.
The complexity of e-commerce transactions
An issue that dates back to the Value Added Tax regime has crept into GST as well.
Purchasers are denied an ITC claim on the ground that the supplier has not paid tax or filed a return for the transaction. As the burden of proof is on the purchaser to show that the law has been complied with, they are often unable to avail of ITC because of non-compliance by the seller, said Shashi Mathews, partner at IndusLaw.
This not only increases the compliance burden for purchasers, but also provides the GST department yet another reason to deny input credit tax. Additionally, this also increases the need for doing vendor diligence before making payments.
Shashi Mathews, Partner, IndusLaw
Considering the issue, the Madras High Court, in a recent judgement, said that a mechanism should be put in place to cast substantial responsibility on the supplier.
There should be amendments to the existing statute to ensure that the sole responsibility to track and ensure compliance by suppliers does not fall on the purchaser, Mathews said.
The current GST law prevents taxpayers from claiming ITC on work-contract services. This includes goods or services used for the construction of immovable property, despite the fact that such immovable property is used in the furtherance of the business.
For instance, a company spending money on constructing or renovating an airport won't be able to claim ITC on the goods used for construction, even though they are vital to the services provided by it.
The tax credit benefit is also not available for such properties that are built solely for the purpose of leasing them out. This is because the law considers such construction as consumption rather than a supply of goods or services.
Several construction companies have challenged this denial in the past. For instance, the Supreme Court is currently hearing a petition in the case of Safari Retreats Pvt. on whether businesses engaged in construction and leasing out of immovable property should be eligible for ITC benefits.
The government should rethink its policy towards construction services, at least in cases where such properties are used in furtherance of the business, Mathews said.
Via the Finance Act, 2023, the government has denied ITC on goods and services used for Corporate Social Responsibility activities.
The denial was prompted by conflicting views held by various Authorities for Advance Ruling. While Maharashtra and Karnataka AARs held that this was a business expense and therefore qualified for ITC, Uttar Pradesh and Kerala AARs took a different view.
Experts said that it's unfair to deny GST on CSR expenses as they are a mandatory business expense under the Companies Act, 2013.
Every company with a specified net worth, turnover, or net profit is mandated to spend 2% of its net profit for the last three years towards specified social causes.
Considering this is a business expense mandated by the statute, the government should re-examine its decision to deny credit for CSR activities, at least to the extent mandated, according to Mathews.
E-commerce platforms have grown significantly in the past few years, but with that growth have come challenges in the indirect tax regime.
The challenges mainly revolve around the determination of the jurisdiction of taxation and the subsequent eligibility for ITC, Vaibhav Kalra, founder and partner at Vidhittas Legal, said.
As goods are delivered over online platforms in a digital transaction, taxpayers may find it difficult to determine the place of supply, especially when it involves intangible goods.
For instance, a buyer can download software from an online source from anywhere in the world. The question of whether supplies were made at the place at which the software is stored or whether they were made at the place at which it was downloaded can complicate an ITC claim, as credit can only be claimed at the place at which it was supplied.
Also, the digital economy involves various innovative business models, such as online marketplaces and platform-based services, which may involve multiple intermediaries in a single transaction. Determining the eligibility of ITC for each intermediary can be challenging in such cases.
To address these problems in the digital realm, the GST Council needs to develop clear and specific guidelines tailored to digital transactions, Kalra said.
BQ Prime@2024 GST Press. All rights reserved.