Context: Recently, the Central Board of Indirect Taxes and Customs (CBIC) has made it mandatory for businesses with a monthly turnover of more than Rs. 50 lakh to pay at least 1% of their Goods and Services Tax (GST) liability in cash, which will be effective from 1st January 2021.

Key Points

• The new rule restricts use of Input Tax Credit (ITC) for discharging GST liability to 99%.
• The CBIC has booked about 12,000 cases of ITC fraud and arrested 365 persons in such cases so far.
• The move will curb tax evasion by way of fake invoicing.
• ITC is provided to set off tax paid on the purchase of raw materials, consumables, goods or services that were used in the manufacturing of goods or services. This helps in avoiding double taxation and the cascading effect of taxes.

However, this restriction will not apply in cases

• Where the managing director or any partner has paid more than Rs. 1 lakh as income tax, or
• The registered person has received a refund amount of more than Rs. 1 lakh in the preceding financial year on account of unutilised input tax credit.

This comes to only 0.37% of the total businesses registered in the GST system.

• Of the total GST taxpayer base of 1.2 crore, only about 4 lakh have monthly supply value greater than Rs. 50 lakh.
• Of these, only about 1.5 lakh pay less than 1% of their GST liability in cash and when exclusions in the rule are applied, around 1.05 lakh taxpayers get further excluded.
• Thus, the rule would apply only to 40,000 to 45,000 taxpayers.

Criticism: It is feared that the mandatory cash payment will adversely affect small businesses, increase their working capital requirement and make GST a more complex indirect tax system.

Government’s Stand: The Department of Revenue has held that these fears are misplaced and “only risky or suspicious dealers and fly-by-night operators” will be affected by the move.

• Government has arrived at this rule after detailed deliberations in the GST Council’s Law Committee to identify and control only fraudsters involved in fake invoices and input tax credits.

Central Board of Indirect Taxes and Customs

• It is a part of the Department of Revenue under the Ministry of Finance.
• The Central Board of Excise and Customs (CBEC) was renamed as the CBIC in 2018 after the roll out of the GST.
• It deals with the tasks of formulation of policy concerning levy and collection of customs, central excise duties, Central GST (CGST) and Integrated GST (IGST).

Additional Information

Input Tax Credit (ITC)

• It is the tax that a business pays on a purchase and that it can use to reduce its tax liability when it makes a sale.
• In simple terms, input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount.
• Exceptions: A business under composition scheme cannot avail of input tax credit. ITC cannot be claimed for personal use or for goods that are exempt.