Several companies in the information technology (IT) and information technology enabled services (ITeS) verticals are reportedly under the taxman's scanner for suspected Goods and Services Tax evasion. According to The Economic Times, preliminary investigations by the indirect tax department revealed that many such companies had increased their capital expenditure after GST was rolled out on July 1, 2017.
The department suspects that the companies did this in order to take advantage of the Input Credit mechanism under GST, an option that did not exist under the previous tax regime. The mechanism essentially allows the taxpayers to claim credit for the taxes paid on purchase.
The report says that several Bengaluru- and Hyderabad-based companies had placed orders for some equipment - mainly servers - much before GST implementation but took deliveries of these after GST was rolled out. Companies that tweaked their purchase orders in the run-up to GST implementation are also being scrutinised. For instance, the taxman is looking into a Hyderabad-based Indian company that had placed an order for a server in January 2017, with an intention to take the delivery after GST is rolled out. This order was cancelled in April and a fresh order for a new server was then placed.
Citing sources in the know the daily added that the tax department may target smaller companies - those with a turnover of Rs 300-500 crore - first, but some of the bigger companies are also under the scanner. About 100 companies are reportedly under scrutiny, however, no notices have been issued yet. In some cases, a letter from the commissioner, seeking explanations on credit taken, is in the works.
The taxman's suspicions were raised courtesy a huge spike in the credits availed by IT & ITeS companies. "In some cases the credit claimed by these companies has jumped by about 50 per cent," said a source, adding that this reduces the GST outgo.
Of course, not all companies that avail of input credit are dubious. "There could be cases where firms have planned their capex well in advance to ensure that the procurements are done after the GST roll out in a perfectly legitimate manner," MS Mani, partner, Deloitte India told the daily.
In a similar vein, Abhishek Rastogi, partner at Khaitan & Co, pointed out that "It is debatable whether an IT firm had deliberately placed an order before GST was rolled out and took delivery only to take credit of such an investment. This is a business decision and transitional period will have such situations. In case the authorities demand tax based on the timing of the capital expenditure, the assessed have a very fair ground to justify the sequence of events".
The onus of proving innocence, through appropriate purchase orders, invoices and capitalisation details, now lies with the firms under the scanner. Should some of them be found guilty as charged, it won't be the first time that the input credit mechanism has been illegally leveraged. Less than two months ago, the GST-Intelligence Unit had reportedly unearthed a racket which used fake bills to claim input tax credit worth Rs 450 crore. The authority had estimated the value of the fictitious purchases at Rs 2,500 crore and the undue gain out of this at around Rs 450 crore at an average GST rate of 18 per cent.
Last September, the Central Board of Excise and Customs had asked its officials to verify all transitional credit claims for more than Rs 1 crore after it received transitional credit claims worth Rs 65,000 crore.
To deal with rising input credit frauds, the GST Council had adopted an invoice matching mechanism but it is reportedly yet to start.