Misuse of input tax credit by businesses low, Centre finds; Most claims seen to be genuine business expenses

The Centre is of the view that the misuse of input tax credit (ITC) by businesses is low given the size of the economy and services sector, and most such expenses are genuine business expenses.

While easing restrictions on availment of blocked ITC credit for several supplies, the GST Council in its recent meeting, however, deferred a proposal to permit ITC for motor vehicles with seating capacity of 13 persons or more under Section 16(2)(c) of the GST Act, 2017. With several states raising concerns over the genuineness of such claims, an officers committee is now expected to look into the issue.

“The likelihood of misuse is low,” said a person familiar with the development, adding that data was reviewed of companies purchasing such vehicles as input supply.

Most such companies are those that are employee-oriented and are in sectors like services, manufacturing, construction, where they use it for transport of their own employees, the source explained.

On further analysis of data of smaller firms, where the risk of misuse of such credit may be greater, it was found that ITC on vehicle purchase by only proprietorship type companies was only 20%.

“States want some more time to review this issue, but we will take it forward in the next meeting,” said the source, adding that an officers’ committee will review the issue.

As part of the rationalised structure of the GST Council, a standing committee of officers has now been approved that would examine proposals to amend law, rules, notifications and forms as well as prepare proposals for the GST Council and will replace the erstwhile fitment committee, sectoral groups and standing committees.

The new committee is a 12-member committee with representation from 12 states, but every state is welcome to attend the meetings and voice their concerns.

States have been divided into three groups based on their GST footprint of big, small and medium states.

While the big states—five in number, including Maharashtra, Uttar Pradesh, Karnataka, Tamil Nadu and Gujarat—would have permanent membership of the committee, membership of the other states would rotate every two years based on each state's relative size in the system.