Mumbai, September 19, 2017

Several Indian companies, including some large entities, may start receiving notices from Monday on transitional tax credits in the run-up to the introduction of the single producer levy, two people with direct knowledge of the developments told ET.

The notices from the indirect-tax department follow last week’s direction from the Central Board of Excise and Customs (CBEC) that asked chief commissioners to verify all transitional credit claims beyond Rs 1 crore. About 160 companies, which collectively have claimed about Rs 65,000 crore in transitional tax credits, would be issued notices in the coming weeks.

“By Friday, chief commissioners had received the names of companies in their jurisdictions and asked for a basic report on the subject. Notices would be issued to companies and explanations would be sought for the amounts claimed in transitional credits,” said a person in the know.

In some cases, the indirect-tax department is also asking companies – particularly some Hyderabad-based infrastructure establishments — to produce the VAT returns of the past one year.

The government is seeking these details to cross-check the transitional credit in GST. Transitional credits are basically tax credits accumulated before July 1 on pre-GST stock. According to the GST law, the credit can be set off against GST liability. Taxmen suspect that some companies are misusing the provision and have filed fake returns.

“The suspicion is that many companies have claimed credit when they do not have proper invoices to support them. Ideally, when this happens, companies could only claim 60% of transitional credit, but some companies seem to have taken 100% credits,” said a tax officer. Industry trackers say that this step by the government has spooked several companies.

“Large companies, with huge inventories, longer cycle time, and substantial monthly tax payments may rightfully have claimed significantly high transition credit,” said MS Mani, partner, Deloitte India. “Hence, all large claims should be evaluated after considering the size of the operations and attendant circumstances. There is an urgent need to define some processes based on which the transition credits are scrutinized, so that credits are not denied on frivolous grounds and unnecessary litigation is avoided.”

Individual companies under the lens could not be ascertained, but the tax officer quoted above said: “Most of these companies being scrutinised are major vendors of some of the biggest Indian companies. In most cases, the companies still have time to rectify their mistakes,” he said.

Some industry trackers say that Rs 65,000 crore as transitional credit in the total GST revenue of Rs 95,000 crore for July appears disproportionate.

“The amount of opening credit does look to be on the higher side, particularly because many companies have not yet filed the TRAN 1. In some cases, companies may have made genuine errors in credits. Many of these companies may revise in the coming weeks,” said Pratik Jain, Partner, National Leader - Indirect Tax - PwC India.

Experts said those scrutinising credits now time may be doing so prematurely as several companies are yet to file GST due to the extended deadline. “The deadline for filing Trans 1form is extended to October 3 and so the department will get final data only then,” said Sachin Menon, national head of indirect tax at KPMG.

[The Economic Times]