Additional tax dues in GST annual return block working capital: Here is why

Month of July saw two major events – commencement of third year of GST and presentation of Union Budget 2019 by the finance minister on July 5, 2019. In the two completed years of GST there have been various measures to simplify the GST Act and ensure least hardship to the trade. Even the first annual return to be filed under GST for the period July 2017 to March 2018 has been extended third times from December 2018 to finally August 2019.

An annual return has to be filed by all registered persons irrespective of their turnover. The annual return will contain all the details of purchase, sales, advances, input tax credit, refunds, demands raised and reversal of credit. The annual return will provide an opportunity to the taxpayer to disclose the sales which were omitted to be reflected in the GST returns, reverse ineligible /wrong input tax credit and other necessary corrections. Due to the said amendments in the annual return there is a possibility of increase in the GST liability for the taxpayer. Further in the case of first year of GST there have been errors made inadvertently by the trade due to ignorance. Voluntarily rectifying the same in annual return is the only option of the taxpayers which may lead to additional GST liability.

Though there are various issues on the procedural front troubling the taxpayer trying to fill the annual return, the main issue that is troubling the taxpayers is that any increase in GST liability in the annual return has to be discharged only through cash ledger, i.e. physical outflow of money. Even if a taxpayer has balance in his input tax credit ledger, same cannot be utilised by them to pay the said liability. One must appreciate the fact that input tax credit is as good as cash in hand. This restriction unnecessarily strains the resources of a tax payer who has sufficient input tax credit to discharge the liability. In the case of an exporter of goods or services if there is any input tax credit to be reversed, though there is sufficient input tax credit balance, they will end up paying the said liability in cash.

Even if one looks at the provisions of the GST Act, option has been granted to the taxpayers to make payment of tax by utilising balance in input tax credit or cash. The restrictions if any is imposed only for making payment of interest and penalty. Further from the pre-GST era, i.e. excise and service tax regime, the judiciary has been very vocal about input tax credit being an indefeasible right of the taxpayer.

The question that arises is whether this right can be taken away by merely incorporating an instruction in the annual return?  Can the tax statutes which have been notified after due deliberations and discussions be completely ignored and a simple condition in the Form take away the legitimate right of the taxpayers?

In the absence of any power to the authorities to impose such restriction, the said condition is bound to be legally challenged. Further, there was no such condition in the formats of annual returns notified on September 4, 2018. However, the revised formats incorporating the suggestions of the trade which were notified on December 31, 2018 have imposed the said unjust condition.

Authorities must appreciate the fact that seamless flow and utilisation of input tax credit was one of the major purposes for introduction of GST. Prohibiting or restricting the use of input tax credit for additional liability arising in GST annual return hampers the lawful right of a taxpayer and leads to working capital blockage.

In the past two years since the introduction of GST, the government has been very proactive and has tried its best to ensure that taxpayers are not put to hardship. Most of the issues of the trade and taxpayers are addressed at the earliest in the best possible manner. Hopefully, the concern of trade for working capital blockage and financial hardships due to compulsory payment of additional dues by cash in course of submitting GST annual return will be addressed at the earliest.