The GST hammer drops on flood-hit Kerala traders
GST Kerala flood, As Kerala battles its worst flood in nearly a century, India’s response to the calamity has won praise. Government of India declared it a level-3 calamity.
GST Kerala flood
As Kerala battles its worst flood in nearly a century, India’s response to the calamity has won praise. Government of India declared it a level-3 calamity (Calamity of server nature). As per estimates, this flood caused more than 450 deaths and a loose of property worth over Rs 21,500 crore. The entire country has stood up in support of Kerala and donated generously but one government department is bucking the trend. This is the Goods & Services tax (GST) Department. GST officials have started seeking information from business and traders in Kerala about merchandise washed away in floods, invoking legal provisions.
Surprised? Don’t be. The GST department is endeavouring to recover amount of Tax Credit on goods lost in floods as there are provisions in law to recover taxes on such goods.
As a norm, GST allows a registered persons to avail Input Tax Credit (ITC) on inputs and capital goods used in furtherance of business (ITC not allowed for composition dealers). However, there are some distinct circumstances Where such credits are reversed Which are prescribed in Section 17.
As per Section 17(5) (h) of CGST Act 2017 “Input Tax Credit shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or fee samples.” Now there was a provision in the Central Excise for Remission of Duty of excise leviable on any excisable goods which due to any natural cause were found to be deficient quantity. (Section 5 of Central Excise Act 1944)
Same provisions were borrowed in Model GST Law released in June 2016 Which also allowed remission of tax on such supplies Which are found to be deficient in quantity due to any natural causes. (Section 11 of Draft Model GST law of June’2016). Astonishingly, this provision was dropped.
Thus, a businessman in kerala has suffered a twofold loss. First, he has lost his goods due to flood and now he has to reserve credit booked/availed on such goods.
Let’s try to understand it with an example. When a person purchases goods, he makes an accounting entry like this:
Goods a/c Debit 100
Input Tax Credit a/c Debt 18
To Bank vendor 118
So, When he purchases goods of Rs. 118, he makes payment of Rs. 118 to the vendor and books value of goods as Rs. 100 and Rs. 18 as ITC. For example, if he sold those goods at Rs. 150 plus taxes (GST : 18%) then total amount is Rs. 18 ITC and makes payment of Rs. 9 (27-18) to the Government.
The accounting entries for reversal of ITC u/s 17(5) (h) are:
Input Tax Credit a/c Debit 18
To Bank 18
So, he has already paid Rs. 118 to the supplier for goods which have been lost but now he has to pay additionally Rs. 18 to the government increasing his loss from Rs. 118 to Rs. 136.
An instruction was issued by Deputy Commissioner, State GST of Mattancherry, Kerala on 21 August 2018 to all Assistant Commissioners with the subject “Disaster Management- Instructiion to Officers – Reg” highlighting the position of flood in their district and quoting section 17(5) (h) of CGST Act.
This order further instructs all officers to issue notice under section 73 (1) form DRC-2 demanding payment of ITC on goods lost or destroyed in Kerala Floods. Noncompliance of this notice could invite penalty equivalent to 10 percent of tax or Rs. 10,000 Whichever is higher.
This order also instructs officers as follows:
- Affix notices in the office premises requesting the tax payers to report damage/lost of goods.
- Conduct meeting of tax consultants and practitioners locally.
- Send mail to all the tax payers to report the loss or damage of goods in format specified in the order.
- Conduct field visit to ascertain the genuineness of the damage reported.
- Cross verify the damage/loss statement with GST data in the back end system
When all of India is praying for Kerala, such steps by the government are shocking even on humanitarian grounds. Government should have first taken steps for re-construction of Kerala rather than taking steps for recovery of ITC. Additionally, the government should allow adjustment of amount received as Kerala calamity Tax with loss ITC on such goods.
This Articles is Published by The Statesman
Note: This Article is Written by CA Abhishek Raja
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