Large companies that buy raw materials and products from small and medium enterprises (SMEs) have to now deal with the new problem of losing GST credits if these SMEs defaults on paying the Goods and Service Tax (GST). Large companies are petrified as most of the SMEs are in a disruptive phase and are on the verge of going bankrupt due to the Covid-19 crisis.
According to Section 16 of the GST framework, these large companies cannot claim input tax credit until their vendors and suppliers pay the Goods and Service tax for the materials and products sold to the companies.
The input tax credit can be claimed by the companies only after the vendor has paid the GST and uploaded the receipt in the GST portal. Then the invoices are matched with the credit eligibility of the company. Full credit can be claimed if there is a 90% accuracy or if there is a 10% problem in the invoices.
COMPANIES RUSH TO THEIR VENDORS
This threat had made many large companies that have a large base of vendors and suppliers to reach them and check if there is a possibility of defaulting the GST.
The nationwide lockdown has affected the MSE sector to a larger extent and left the companies to face a major crunch. These sectors are not able to continue their operations as there was a shortage of raw materials and laborers which largely pushed them into crisis.
MS Mani, a partner at Deloitte India said that the large businesses are considering indemnity arrangements to safeguard themselves from vendor defaults arising from the extended timelines for GST payments and returns provided to smaller businesses. He also stated that there is a need to re-evaluate the vendor selection policies based on previous compliance track records.
Some people who are aware of this issue said that many large companies have started to ask their suppliers an indemnity letter.
A tax expert said that some of the large companies have stopped the payment to the suppliers and vendors to pressure them to pay the GST on time and so the company can avail tax credit to the purchase.
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