While IT / IT enabled service sectors have a leverage to provide remote access for employees to work from home, other sectors such as manufacturing, hospitality are facing huge operational challenges.

With respect to the financial restrictions, Ministry of Finance, Government of India has announced various relief measures including moratorium on term loans and other incentives to tackle the current economic situation. Although these measures provide major relief, the businesses are facing certain practical difficulties with respect to adherence to the provisions of tax laws on a day to day basis.

Against this backdrop, we are discussing in this article some of the provisions regarding GST law where businesses are facing challenges.

Blocked input tax credits (ITC)

Expenses on employee benefits is one major expense, where credit is ineligible for a business as per section 17(5) of the CGST Act 2017. In the present situation, there is a moral obligation on the part of businesses to provide certain facilities to their employees, which includes:

• Medical insurance to employees covering the pandemic risk

• Safe transportation of employees to the work premises

• Accommodation to employees near the business premises to ensure business is carried out with minimum disruption

• Food for employees during the lockdown

• Reimbursement of expenses related to internet and telephone facility to employees

Moreover, in the current scenario, incurring such expenses are essential for optimal and efficient functioning of the business. Disallowance of ITC on these expenses, indirectly increases the cost of production which would further impact the Indian businesses adversely.Pursuant to the guidelines issued by Ministry of Home Affairs and as a moral obligation businesses are incurring huge cost in the form of above-mentioned expenses during this crisis as precautionary measure to avoid any risk of an employee contracting the disease which could hamper the businesses directly at this time.

Section 17(5) further restricts ITC on any goods lost, stolen, written off or disposed by way of gifts or samples. Since the government has announced a sudden lockdown, those businesses which were dealing with products of short to very short shelf life, would have write offs on perished goods resulting in huge reversal of input tax credit. Thus, in addition to the loss of goods on account of such disposal and writing off, blocking of ITC incurred on such goods is another impediment for such companies.

Various corporates have come forward to donate essential supplies such as face mask, gloves, and food products to the government and the needy. ITC on such expenses are also blocked for the companies on such goods. Allowing business to avail ITC on such expenses would encourage them to involve in more CSR activities which would be additional support to the government during the crisis.

Cash crunch

The current crisis has resulted in a severe working capital issue for the business, which would eventually result in non-payment of their invoices leading to considerable risk of increased bad debts.

On certain supplies made on contract basis, due to the current situation the customers would invoke the Force Majeure clause in the contract and may not make payments to the suppliers. The suppliers on the other hand, has deposited the tax on such supplies to the government and will not be able to recover the same from their customers since it has resulted in a bad debt. However, Section 34 of CGST Act which speaks about the scenarios where credit and debit notes can be raised, is silent on issue of credit notes on account of invocation of force majeure clause. Thus, in addition to the supply becoming bad debt, there is no recourse available in the GST law to adjust the self-assessed tax paid on such supplies.

Section 16(4) of CGST Act 2017, restricts availing of ITC on invoices for which payment is not made to the supplier within 180 days from date of issue of invoice. Due to the current situation the average payment cycle in the industry is severely impacted and any non-compliance to this condition would further add to an increased tax liability to the taxpayers.

Since the pandemic has created a global financial crisis, it is likely that there could be delay in realisation of the export proceeds for supplies made abroad. Though GST refund on export of goods can be claimed using the customs certified shipping bills, Refund for export of services can be claimed only on basis of FIRC Copies certified by the bank. Since there would be a delay in realization of export proceeds, there would be a delay in claiming GST refund on export of services on time resulting in working capital issues for the service exporters.

Compliance burden

The Central Board of Indirect tax & Customs (CBIC) has recently waived the late fee for filing of GSTR 3B and GSTR 1 for the period February 2020 to April 2020. However, the interest on delayed payment of tax is not waived off for large taxpayers. A complete waiver of interest is also required considering the fact that most of the companies are only working with less than half of their regular capabilities and other hardships faced by the businesses.

Reconciliation between the GSTR 3B and GSTR 2A would be challenging as the supplier may default filing of GSTR 1 or may file it on a later period. Relaxation has been given for applying the provisions of Section 36(4), until September 2020. In case the supplier fails to file the GSTR-1 before September, ITC availed on such invoices needs to be reversed by the recipients and interest at the rate of 24% which is payable after reversal of such ITC, which would have a severe cash flow impact on the business. Considering the cash crunch and other hardships faced by the industries, providing extended timeline would further benefit the taxpayers to avail the input credit without waiting for the supplier to upload the invoices.

Conclusion

Above are the immediate points the taxpayer needs to be aware during the crisis period. Providing tax relief to businesses is as important to the economy as finding a cure for the virus. The following are some of the temporary measures the government may consider with regard to GST in the current situation.

• Suspending section 50 (interest on delayed payment of tax) for the entire financial year.

• Suspending the applicability of Rule 36(4) for the entire financial year.

• Granting provisional or conditional refund on export of services based on certificate or declaration from the customer and the local supplier without waiting for copies of foreign inward remittance certificates (FIRC).

• Amendment on section 34 on debit notes and credit notes so as to include a provision for issue of credit note due to invocation of force majeure clause by the customers.

Businesses would expect the government to consider the current scenario and provide certain temporary relaxation with regards to the applicability of certain provisions of the GST law, which would help them manage the situation and give them some breathing space during this challenging period.