Paying 1% GST in cash will not impact small businesses and dealers

Sources in the Finance ministry have said that the new rule requiring businesses to pay at least 1 per cent of their GST liability in cash will not impact small businesses and dealers as only entities with annual turnover of Rs 6 crore and above are required to follow this rule.

After finding out numerous use of fake invoices to evade goods and services tax (GST), the Central Board of Indirect Taxes and Customs (CBIC) had last week amended rules to make it mandatory for businesses with monthly turnover of over Rs 50 lakh to pay at least 1 per cent of their GST liability in cash.

This rule applies only to about 45,000 taxpayers of the GST taxpayer base of 1.2 crore and genuine dealers and businesses would not be impacted. The rule has been brought to check the use of fake invoices to claim credit for tax paid on
non-existent or highly inflated input cost.

Effective from January 1,2021 the new rule restricts the use of input tax credit (ITC) for discharging GST liability to 99 per cent. It would apply only to risky or suspicious dealers who use a lot of fake credit and make no cash tax payment, it is understood. The CBIC has booked about 12,000 cases of ITC fraud and arrested 365 persons in such cases so far. More than 165 fraudsters have been arrested in last six weeks.

Dummy companies which generate fake ITC or are used to be a layer in multi-layer fake credit, pay no tax in cash.

“This provision is a very smart rule against fraudsters and would not affect any genuine business entities or ‘Ease of Doing Business’ in any manner,” an official said adding that all small businesses including MSMEs (micro, small and medium enterprises) and composition dealers have been excluded from the rule.The rule is applicable to registered persons whose value of taxable supply, other than exempt supply and export in a month exceeds Rs 50 lakh or Rs 6 crore annually.

The rule is not applicable in cases where a registered person deposited more than Rs 1 lakh as income tax in each of the last two years and also wherein a registered person has received a refund of more than Rs 1 lakh in the preceding financial year on account of export or inverted tax structure.

The rule is also not applicable to government departments, public sector undertakings and local authorities.