The indirect tax department is scrutinizing capital expenditure incurred by information technology (IT) and information technology enabled services (ITeS) companies, suspecting they may have evaded Goods and Services Tax (GST) liabilities. 

Preliminary investigations by the indirect tax department found that many companies had increased their capital expenditure after GST was rolled out on July 1, 2017. In several cases, many Bengaluru and Hyderabad based IT and ITeS companies had placed orders for some equipment-—mainly servers—long before GST implementation but took deliveries of these after GST was rolled out. 

Taxmen suspect that this was done to take credit on these purchases under GST. Taking credit on such expenses and investments was not possible in the earlier tax regime. 

Many companies especially in telecom, banking, and IT/ITeS sector, say, insiders, had put some of their investments on hold until GST was rolled out. No notices have been issued yet, but about 100 companies are under scrutiny and in some cases a letter by the commissioner is being written, seeking explanations on credit taken on such transactions. 

Tax experts point out that similar expenses—buying equipment or furniture in offices-—were treated differently depending on whether the company was in manufacturing or services. Companies in services sector were not allowed to set off these purchases or investments against future tax liability. 

Under the GST framework, even services companies can take credit of these expenses. 

Credit mechanism is basically setting off some of the costs against future tax liabilities. Legal experts say that it would be difficult for the tax department to prove that intention of the companies was to escape tax. 

The tax department may first target smaller companies— typically Rs 300-500 crore turnover, say people in the know. Some of the bigger companies are also under scrutiny but they may receive notices at a later stage. The issue came to the tax department’s attention as there was a tremendous spurt in the credits availed by these companies. 

“In some cases, the credit claimed by these companies has jumped by about 50%. When these credits are taken what happens is that the GST outgo comes down,” said a person close to the development. 

Under scrutiny are also those companies that may have tweaked their purchases. 

Like in the case of a Hyderabad-based Indian company where the order for a server was placed in January 2017, with an intention to take the delivery after GST is rolled out. The order was canceled in April and a fresh order for a new server was placed. 

Source: Economic Times

We have launched Single Platform on GST Compliances In India, assisting in 4 areas – 1) Compliances, 2) Litigations & Hearings, 3) Training  4) Consultancy. Click this link for any assistance.