India’s Tax Authorities Tighten GST Scrutiny on Small Businesses

• India’s new GST compliance requirements for small businesses seek to put a stop to the practice of fake invoicing.
• All businesses whose monthly turnover exceeds INR 5 million must pay at least one percent of their GST liability in cash.
• Restrictions are placed on filing outward supply details in the GSTR-1 form for businesses that have not yet filed the GSTR-3B form or paid tax dues.

Micro corporations to pay one percent of GST liability in cash

As per Rule 86B, the Central Board of Indirect Taxes and Customs (CBIC) has introduced a new rule – applicable from January 1, 2021 – that requires all businesses whose monthly turnover exceeds INR 5 million (US$68,104) to mandatorily pay at least one percent of their goods and services tax (GST) liability in cash.

Besides this, the CBIC has also imposed a restriction on the use of input tax credit (ITC) available in the electronic credit ledger for the discharge of GST liability to 99 percent. Basically, more than 99 percent of the output tax liability cannot be discharged by using input tax credit. (By input credit, it means that at the time of paying tax on output, one can reduce the tax already paid on inputs and pay the balance amount. Input tax credit is thus key to avoiding the cascading effect of taxation.)

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There are some exceptions to the implementation of Rule 86B. For example, if the managing director or another partner of the firm has paid more than INR 100,000 (US$1,362) as income tax in the preceding financial year, on account of unutilized ITC, then the restriction will not be applicable.

The aim of this imposition is to stop businesses from applying for fake tax credit that will lead to their misutilization by dishonestly reducing actual tax liability.

According to the Finance Minister Nirmala Sitharaman, “In order to curb the GST fake invoice frauds, the government on the recommendations of the GST Council’s Law Committee has issued a notification to deal with the menace of fraudsters who avail and pass on intelligible ITC by fake or fly-by-night firms.”

Fraudulent GST registrations that are made by businesses for the purpose of passing ITC can be checked by either physically verifying the business’ premises or verifying the authentication of the Aadhaar numbers. If tax authorities find evidence of tax evasion, the firm’s GST registration will be suspended; in specific cases where there are significant discrepancies – the GST registration will be outright cancelled.

The government is keen to stop the rampant tax evasion – likely also facilitated by the exigencies related to the ongoing pandemic – as the burden of low national tax collection eventually falls on the backs of honest taxpayers who diligently pay their taxes on time.

Filing GSTR-1: New restriction introduced

Another GST amendment includes a restriction placed on filing outward supply details in the GSTR-1 form for those businesses that have not yet paid their taxes for past periods, by filing the GSTR-3B form. (New sub-rule 6 added to rule 59 of the CGST Rules, 2017.)

Earlier, not filing the GSTR-3B resulted in a blockage of the e-way bill (digital permit), but with the current amendment, it will also lead to blocking the GSTR-1 form. The whole idea behind blocking filing access to the GSTR-1 form is to ensure that businesses who have not even paid their GST dues cannot curb ITC.  

Now, when quarterly filing the GSTR-1, in case the GSTR-3B hasn’t been filed for the preceding tax period, then neither the Invoice Furnishing Facility (IFF) nor the GSTR-1 for the current quarter will be allowed.

To prevent confusion regarding the new forms and maintain compliance, businesses are welcome to reach out to our tax advisors at india@dezshira.com.

What is the effect on MSMEs?

Micro, small, and medium sized enterprises (MSMEs) are the backbone of India’s economy, creating bulk of the country’s employment opportunities and contribution to exports and the GDP. Given their size and financial contribution, the government wants to ensure these enterprises are tax compliant or else policy moves to reform tax administration and promote ease of doing business will fall flat. This is also key to boosting the country’s net tax collection.

From December 2020 onwards, micro corporations – which are defined as businesses whose sales are less than INR 50 million (US$681,047) – will no longer be able to generate an e-way bill for the transportation of their goods, if they have defaulted on submitting return forms for two consecutive tax periods.

Since its roll-out in 2017, many MSMEs have struggled to conform with GST norms due to the difficulty of filing a large number of GST returns on a timely basis. While some MSMEs have been able to adopt the latest technology that helps them deal with the increased compliance work online, most businesses still have a long way to go – either because they are unwilling to make necessary transitions to their tax and accounting processes or lack the expertise to do so, are unable to afford support for increased compliance work, or are digitally illiterate. Problems related to IT solutions combined with the added cost of IT infrastructure are among the main reasons for reporting inconsistencies by small business owners. Besides this, the IT infrastructure behind the GST regime is also not without its problems, such as lack of formalization, perennial trouble of delayed payments, etc.

Nevertheless, the government’s doubling down on tax enforcement norms comes after major loss of revenue due to the COVID-19 pandemic. Initially more forgiving of slow compliance, India’s tax authorities can no longer afford to be as liberal anymore.

Meanwhile, the ambit of compliance on large businesses has also widened. GST compliances applicable on large businesses began to be strictly enforced starting October 15, 2020.

Apart from combatting revenue loss, the stricter compliance requirements intend to set up a precedent for MSMEs to practice good tax behavior, which over the long-term will contribute to their health and stability.

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