Once Taxed, Now Exempted: Traders Worried, Fear Losing Input Tax Credit

This is because the 56th GST Council has exempted many goods and services of mass consumption, previously falling under the 18, 12, and 5 per cent tax slabs, from the revised rates.

This means that traders who have purchased these goods after paying taxes will not be eligible for input tax credit (ITC) or refunds on these. Trade leaders estimate this amount to run into several thousand crores. Tax experts say that even litigation won't enable them to get their money.

Items Exempted Under GST 2.0

The 56th GST Council exempted dairy and bakery staples, certain life-saving drugs and medical items, selected goods for educational needs like stationery, some everyday items, as well as premiums on life and health insurance, from the new GST.

Traders buy these goods by paying taxes, and offset the tax paid against the tax payable in the form of ITC. With the final goods exempt from tax, there is no way to claim the credit, said Jayendra Tanna, Chairman of the Federation of All India Vyapar Mandal (FAIVM). “Such traders work on very thin margins, and will run into debts of several lakhs. They cannot afford the taxes they have paid upfront, not being credited or refunded,” said Tanna. 

When asked if there is a way to liquidate the credit, Nitesh Jain, a chartered accountant and managing partner of N J Jain and Associates, said there is no way for a trader to claim this money under the prevailing tax regime.

He, however, said that businessmen whose goods now fall under the 5 per cent tax slab can claim ITC. “They can claim the credit against the tax payable,” he said. Goods now falling under the 5 per cent tax rate are also exposed to the inverted duty structure, and hence eligible for credit against tax payable. 

Users of textile machinery will also find it difficult to recover their ITC paid on the machinery, for which they have paid an 18 per cent tax. Ashish Gujarati, vice-president of the Southern Gujarat Chamber of Commerce and Industry (SGCCI), said machinery is costly and involves investment of crores of rupees. Consequently, the GST paid is also high. While it can be claimed through ITC, it takes almost the lifetime of the machine to recover the credit, blocking valuable working capital for businesses.

An Unwanted Burden

Tanna said that in most cases, businessmen take loans for investment and working capital and have to pay interest. In this case, it will be a "dead investment" and a burden on them.

Jitendra Shah, president of the Federation of Associations of Maharashtra (FAM), welcomed the changes in the GST structure, saying it would boost sales during the festive season. He, however, said businesses are waiting for the government's fine print on availing ITC and refunds, where the inverted duty structure is now applied.

“The government has assured repayment of ITC, and we're awaiting the modalities to be announced. We expect some more changes to ease the complications,” said Shah.

PM's Swadeshi Pitch

Meanwhile, Prime Minister Narendra Modi, in his Sunday address to the nation, said that the two-slab tax structure of 5 per cent and 18 per cent will promote spending by the masses.

“This GST savings festival will increase your savings, and you'll be able to purchase the things you want more easily,” he said. “These reforms will accelerate India's growth story, make doing business easier, investments more attractive, and every state an equal partner in the race for development,” he added.

He also urged Indians to buy goods made in India. “Just as the country's Independence was strengthened by the mantra of Swadeshi, so will the country's prosperity be strengthened by the Swadeshi mantra,” he said.