The new rule has been implemented to check the use of fake invoices that claim credit for tax paid on non-existent or highly inflated input cost.
Small businesses and dealers will not be impacted by the government's new rule that requires businesses to pay at least 1 per cent of GST liability in cash, as only entities with an annual turnover of Rs 6 crore and above are required to follow the new rule, Finance Ministry sources said.
After unearthing rampant 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.
Sources said the rule applies only to about 45,000 taxpayers out of the GST taxpayer base of 1.2 crore and genuine dealers and businesses would not be impacted.
The new rule, they said, has been brought to check the use of fake invoices to claim credit for tax paid on non-existent or highly inflated input cost.
The new rule restricts the use of input tax credit (ITC) for discharging GST liability to 99 per cent, effective January 1, 2021.
The sources added that the rule would help to control use of fake invoices by fraudsters who avail and pass on ITC to dummy, fake and dormant entities which show high turnovers, but have no financial credibility, and flee after issuing fake invoices and misusing ITC.
They said the rule would apply only to risky or suspicious dealers who use a lot of fake credit and make no cash tax payment. Dummy companies which generate fake ITC or are used to be a layer in multi-layer fake credit flow 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," the sources said, adding that all small businesses, including MSMEs and composition dealers, have been excluded from the rule.
They emphasised that exceptions and exclusions have also been provided based on income tax track record and refund obtained in last year.
They said that with these exemptions, conditions and precise targeting, the requirement of mandatory payment of at least 1 per cent of the tax liability in cash would apply only to risky or suspicious dealers, and genuine dealers would remain excluded.
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, they added.
The rule is not applicable in cases where the registered person deposited more than Rs 1 lakh as income tax in each of the last two years and also wherein registered person has received a refund of more than Rs 1 lakh in the preceding financial year on account of the export or inverted tax structure.
The rule is not applicable to government departments, PSUs and local authorities.
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 the last six weeks alone.