At the 38th GST Council meeting, the Central Board of Indirect Taxes and Customs (CBIC) decided that total unmatched credit cannot exceed 20 percent of input tax credit (ITC) available in GSTR 2A. This announcement is likely to adversely impact MSMEs in terms of their cash flows given their reliance on select vendors and suppliers. Larger enterprises, on the other hand, will be better cushioned against its effect, since they are better equipped from a finance and technology perspective.
Explaining the impact of this GST rule amendment, Akash Gehani, Co-Founder and COO, Instamojo said that MSMEs who often find supplier invoices or debit notes with incorrect or missing information could lose the entire ITC, which is potentially devastating for them. “Typically, MSMEs could claim GST paid as ITC after filing their returns. Now, they have to wait and hope that the other party has paid the GST Council, without inaccuracies. Till that time, they can claim only 20 percent of the amount as credit, and have to provision the balance 80 percent from their books,” he said.
This could put a strain on working capital and negatively impact cash flow management. “For instance, if a product or service comes with an 18 percent tax bracket, and you have paid 18 percent of the total value as GST, you should get credit worth the amount paid. Instead, you will end up getting zero credit, which implies that the 18 percent paid is wasted,” Gehani elaborated.
Fortunately, MSMEs can use GST Council’s tech-enabled platform to document their B2B transactions for GST claims and get purchase tax credited to their ‘electronic credit’. What is needed is promptness in filing returns, and following up to ensure their suppliers are doing it too, and ensuring no discrepancies in invoice, amount, GST number, etc.
“The way the system is designed, ideally, if you need the payment and upload the correct number for the invoice you are making the payment and the supplier does that too, it is automatically credited in your account,” Gehani pointed out.
To gain access to their own finance, he advises MSMEs to become more tech-forward. They can access the GST portal regularly to check if a particular vendor has filed their returns and pursue them, if needed. However, most MSMEs do not know where and how to check these details, which can become an issue. One solution to this conundrum is to discuss tax filing and GST openly with suppliers, even if it’s a time-consuming affair. After all, MSMEs who aren’t GST compliant cannot avail the ITC claim. So it’s everyone’s best interest to ensure compliance.