Industry seeks ITC use for reverse-charge GST ahead of Oct 7 Council meet | Economy & Policy News

Ahead of the Goods and Services Tax (GST) Council meeting on October 7, the industry has urged the council to allow businesses to use their available input tax credit (ITC) to pay tax under the reverse charge mechanism (RCM), instead of requiring them to first pay the tax in cash and claim the same amount as credit, according to three people familiar with the matter.

 Under the normal GST system, the seller collects the tax from the buyer and pays it to the government. Under RCM, the government instead makes the buyer or recipient responsible for paying the tax. This is generally done for certain transactions where collecting the tax from the supplier is considered less practical or effective. For example, when the supplier is overseas or where the law specifically places the liability on the recipient. RCM also applies to some specified domestic goods and services.

 Industry says this creates a working-capital burden, particularly for businesses that already have substantial ITC lying unused in their credit ledgers. ITC is GST already paid on purchases that a business can normally set off against its output tax.

According to Prashanth Agarwal, Partner at PwC India, payment of GST on RCM transactions in cash has been onerous for quite a few industry players as it can result in working-capital blockage and credit accumulation. Although taxpayers across industries have faced this challenge since GST began, it has become more acute for sectors that undertook large capital expenditure and then saw rates cut under GST 2.0 last year. These include FMCG, pharma, footwear and automobiles. Industry has therefore sought permission to discharge such liability from the balance in the taxpayer’s electronic credit ledger.

“Enabling the same in all scenarios would go a long way in supporting the industry at large and unlocking the blocked capital in the form of accumulated credits.”

Abhishek Jain, Indirect Tax Head & Partner, KPMG, said, “using accumulated credit to pay reverse charge liability has been a standing ask since the service tax days. It is an especially pressing concern for inverted-duty businesses, who face an 18 per cent cash outflow on import of services while sitting on credit they cannot use. Their ask being to either allow credit utilisation for payment of such liabilities, or reduce the rate on such reverse charge supplies where inversion is structural.”

In addition, according to Agarwal, the government should continue to look at additional measures that help the industry in liquidating accumulated GST credits and thereby allow industries to further contribute to the economy. This would be a practical and meaningful step towards making GST a truly seamless revenue-neutral tax.