The indirect tax department of India has issues several notices to hundreds of companies who claimed that late input tax credit under GST framework. However in order to understand this issue, it is important to first know the system of input tax credit and the way it works along with the criteria that needs to be fulfilled before claiming it.

Input tax credit system

Input tax credit system or ITC is a system of tax payment where business companies can claim credit on the extent of tax paid on each purchase in order to reduce their overall tax liability.

How does ITC work?

The method by which ITC works can be understood by the help of an example. If the MRP of a product is INR 1000, and the rate of GST is 18%, then the consumer has to pay a total of INR 1180 to the seller. This includes a GST of INR 180. Without the use of ITC, the seller has to pay that amount of GST to the government. However by using the system of ITC, the total tax which needs to be paid to the government can be reduced.

Conditions when ITC can be claimed

A business company which claims ITC must meet several requirements in order for the claim to be acceptable by the tax department.

  • The company must have a GST complaint invoice
  • The supplier of the company should upload the invoice to GSTN
  • The company supplier must have paid the amount of GST to the government
  • Returns should be filed

ITC notice to companies

It is absolutely clear that the system of ITC is highly advantageous to the business owners. However the tax department has issued notices to those companies which claimed ITC under the GST framework after they had missed the deadline set by the government. The tax department has asked these companies to reverse their previous transactions and pay interest on the credits. However this can prove to be disastrous to the tax payers since they would have to pay increased tax amounts to the government leading to their overall loss.

Tax experts however say, that these notice can be challenged in the court. Thus, the companies who had filed ITC have only two options left to them. The first is to pay the amount as asked by the tax department and the second is to challenge these notices in the court. The tax experts also said that the timeline cannot be considered mandatory for availing credit, since right is accrued at the time of making the payment and procuring the product.

The companies which have been handed these notices regarding the late filling of ITC are based largely in the States of Maharashtra, New Delhi, West Bengal and Tamil Nadu. If the tax department does not consider their ITC request, these companies will have to pay a huge amount of money along with interest which can bring down their financial position significantly, affecting the overall economy of the companies and ultimately the states.

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