The Goods and Services Tax (GST) regime in India has undergone a series of amendments to simplify compliance and remove ambiguities. The latest amendment, Notification No. 18/2022, adds an important clause to Section 16(4) of the Central Goods and Services Tax (CGST) Act – Input Tax Credit (ITC). In this article, we will delve deeper into the significance of the amended Section 16(4) of the CGST Act, and how it impacts Small and Medium businesses (SMBs) and Startup founders in India.
The ITC mechanism allows businesses to claim a credit for the tax paid on inputs that they use for providing goods or services. The credit can be used to offset the tax liability on the output supplies made by the registered entity. For instance, assume that a manufacturer purchases raw materials worth INR 1 lakh and pays a GST of INR 18,000. The manufacturer uses the raw materials to manufacture finished goods and sells them for INR 2 lakhs, attracting a GST of INR 36,000. In this case, the manufacturer can claim an ITC of INR 18,000 and pay only INR 18,000 as the net GST liability.
The notification issued by the Ministry of Finance amends Section 16(4) of the CGST Act, which pertains to the eligibility criteria for claiming ITC. The amended section states that ITC can only be claimed by a registered person from the date of the invoice or debit note issued by the supplier or the date of filing of the GST return, whichever is earlier.The amendment aims to curb the practice of availing ITC without the actual receipt of goods or services. Earlier, businesses could claim ITC on the basis of provisional invoices, which led to the blocking of ITC claims and revenue loss to the government.
The amendment to Section 16(4) of the CGST Act may have a significant impact on SMBs and Startup founders in India, especially those that rely on ITC to offset their tax liabilities. The amendment restricts businesses from availing ITC without the actual receipt of goods or services, which may lead to cash flow issues.SMBs and Startup founders may face challenges in timely availing ITC due to delays in the receipt of goods or services, leading to an increase in the working capital requirement. Additionally, businesses may have to renegotiate their payment terms with suppliers to ensure timely receipt of goods or services.
The amendment to Section 16(4) of the CGST Act under notification No. 18/2022 is a significant step towards curbing the misuse of ITC and reducing revenue leakage. However, it may have a significant impact on the working capital requirements of SMBs and Startup founders in India. The businesses may have to restructure their payment terms with suppliers and streamline their internal processes to ensure timely availing of ITC.It is, therefore, crucial for businesses to understand the implications of the amendment and stay compliant with the GST regulations to avoid any penalties or fines.
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