Companies stare at cash flow problems due to new credit utilisation rules!
A tweak in the rule of how Goods and Services Tax (GST) credit should be availed is set to create a major cash flow problem for several companies beginning this month.
The government late last year had come out with credit utilisation mechanism that companies have to follow beginning this month. Under the GST framework, to avoid double counting of taxes, companies can accumulate tax paid on raw materials against those levied on goods they sell.
Prior to the regulation companies could set off IGST credit against both CGST and SGST. However, as per the new utilisation regulations this cannot be done. And IGST credit has to be first utilised before availing CGST or SGST credit.
Tax experts say that this has started to result in situations where on one hand companies have credit lying on their books but they still have to end up paying GST in cash.
“This amendment has become a point of worry for most industry players, as they may now have to pay SGST liability in cash even in scenarios where prior to this amendment these could be paid by utilizing credits; the reason being the introduction of this new rule of utilization of IGST credit,” said Abhishek Jain, Tax Partner, EY India.
IGST credit is basically accumulated by companies that import goods or have vendors outside the state they are based. Most of the businesses have started facing the trouble said industry trackers. Tax experts say that in the coming months this regulation could also result in litigation.
The only way companies can solve the problem is by altering their supply chain structures. This, say industry experts, may not be possible for most companies as supply chains cannot be determined merely to save taxes. Under the earlier tax regulations if a company has IGST credit, it could be set off partially against CGST and SGST. This often meant that companies would also set off CGST credit and SGST credit. Under the new regulations IGST credit has to be utilised first.
In several situations this means that IGST credit is utilised against IGST and CGST tax liability. And even when companies are left with CGST or SGST credit, that cannot be used to set off remaining CGST or SGST taxes. Industry trackers say that for many companies that have national presence they would see that in one state they would have huge credit lying while in other states they would have huge pending taxes.
SOURCE :- THE ECONOMIC TIMES