Liability linkage provision in GST to hit small traders
A provision in the model goods and services tax (GST) law to ensure the smooth flow of credit and minimise tax evasion could hit small businesses and suppliers by favouring bigger and financially stronger ones. The 'liability linkage provision' allows the buyer credit for tax paid on inputs used only if the supplier has paid the tax within a given window. The provision, to be discussed at the meeting of the GST Council on March 4-5, calls for reversal of credit to the buyer in case of noncompliance by the vendor. That is, a buyer would be penalised for the supplier's non-compliance. "This seems unfair as it penalises the buyer for someone else's fault," said Pratik Jain, indirect tax leader, PwC. "It could lead to preference in terms of dealing with bigger vendors which could hit the SME (small and medium enterprises) sector hard." The provision has its roots in the concept of vendor matching that was introduced to ensure that the government has an audit trail to see if every sale has a corresponding purchase. In case of any mismatch, tax officials will proceed against the concerned vendor. Tally Solutions managing director Bharat Goenka said SMEs sometimes face payment cycle issues and will be penalised for delayed payments. He suggested that the valid return of a supplier should be made the basis for input credit instead of linking validity to payment of liability. "This simple change will anyway unlock the businesses, improve compliance, and dramatically reduce fraud due to the triangulated nature of GST," Goenka said. The government wants to roll out GST from July 1. The relevant laws need to be approved by the GST Council and passed by parliament to ensure the legal process is complete by then. The GST Council will try and clear all the legislation during its two-day meeting on March 4-5.