INPUT CREDIT RULE IN GST AND PREVIOUS SERVICE TAX.
Even in the earliest regime service tax, under the CENVAT Credit Rules, while availing CENVAT Credit upon fulfillment of basic conditions of the service provider by providing as name, address, and registration no &, name and address, and registration number of the service recipient would suffice to avail the CENVAT Credit. Since the Previous tax regime, there was no linkage of Tax registration number and credit was solely paper-driven work, as long as basic conditions were satisfied the credit was eligible.
In the GST regime, the same business practices have been followed by most of the customs Agents. Upon instructions by the clients & GST requirement o GST LAw the customs brokers are now passing on GST registration Number to sub-agencies and a few of the sub-agencies started putting the number of the ultimate clients.
Now look at the practical aspect of the transactions and difficulty that arises while availing credit under GST:
- What if sub-agencies issues invoice in the name of Customs Agent:
Normally sub-agencies are employed by the Customs Agent, therefore such sub agencies issue invoices in the name of Customs Agent. However, customs Agent works under ‘Pure Agent’, therefore invoices of sub-agencies are not booked as expenses in the books of account of a customs Agent, naturally, the expenses do not belong to the customs Agent, the input tax credit appearing in GSTR 2A would not be eligible to the Customs Agent. As there is no legitimate claimant for the credit, the credit would lapse.
What if the Agent does are not following the ‘pure agent’ mechanism and chooses to charge full tax on the whole bunch of services procured by him on account of his clients. Although looks like an easy solution, the customs broker should agree to the same. As in terms of direct taxation and accounting, the compliance burden would go up in multifold for customs Agents. eg. The turnover showing in financials statements let’s say 1.50 Cr, out of which 1 Cr could be reimbursement and 50 Lakhs would be actual agency income. it represents the there is straightway 1 Cr is cost towards third party services apart from his own administrative cost which is to be knocked off against agency income, the impact of reimbursement include in the financial statements is the effect the remained margin would be very minimal and may not be comparable to the other customs broker who does not follow the identical accounting practice.
Even, we presume for the time being that the Customs Broker has received all invoices from sub-agencies on his own account, still, there would be challenges on the eligibility of input tax credit. As per Section 16 of the Central Goods and Service Tax, 2017, which talks about the eligibility of the input tax credit of any supply of goods or services of both to a registered person ‘which are used or intended to be used in the course or furtherance of his business. Therefore, even Customs Broker would not be able to avail the input tax credit as the goods or services are not used in his own business.
- What happens if sub-agencies issues GST invoice in the name client:
For the time being, we may assume that the customs broker passes on the details of the client to respective sub-agencies, and such sub-agencies issue invoices in the name of the end client. Thus, there would be a bunch of documents including agency invoices along with all supporting invoices (from sub-agencies). However, as per the normal accounting practice, the income is only Customs Agent invoice should be booked in accounting purpose as it includes all expenses (though reimbursement), further which is logically correct also as the privity of contract apply among the Client and customs broker.
Now the issue arises where the assessee wishes to avail the Input Tax Credit, then such entries need to be plotted in books of account, as the data would be flowing from the accounting system only. Therefore, the environment like SAP and other ERP accounting system, where separate vendor needs to be created in the system, which itself is a task. Upon creation of the vendor, a number of entries need to be posted based on the number of documents and sub-agencies involved. After doing all these exercises, there won’t be any direct payment and all payment entries need to be routed through the Customs Agent.
In the first case, GSTR 2A would reflect the separate line item for each of the invoices issued by sub-agencies, however, the said credit would not be there in books as the consolidated entry has been passed based on the customs Agent invoice. If the number of transactions is high in volume then the credit involved would also be high, therefore the assessee can not afford to leave the amount as expenses. The practical way to avail the Input tax credit is to book the credit based on GSTR -2A as reflected by the respective sub-agencies, this would happen with proper communication among the parties otherwise, there won’t be any control in terms of correctness and completeness of the data.
The appropriate way could be as envisaged in the second case, however, there would be a lot of entries that need to be passed in accounts, and those need to be reconciled with GSTR -2A. This seems to be practically challenging, considering the number of documents and agencies involved.
Surprisingly, custom Agents are not following such type of accounting practice across India, which is causing hardship in terms of availing Input Tax Credit for the clients. As of now, the clients are unable to claim an input tax credit in their books in absence of uniform methodology by a customs agent and compulsorily needs to be expensed out. Further, the issue arises for reconciliation with GSTR – 2A vis-à-vis credit booked in books of account this needs to be considered.
Now a day in this time being reverse charge on unregistered service providers have been postponed, else another nagging issue would have been, how to compute GST liability on such supplies?
A similar issue is with airline booking, where the booking is done through agents.
In view of the difficulty faced while availing credit, there should be some mechanism to be devised to avoid such leakages of the legitimate input tax credit.