Input Tax credit – Online corresponding
One of the main characteristics of the VAT system is that it permits input tax credit to the business entity and efficiently, taxes VAT only on the ‘value addition’. At the same time as this feature (of the input tax credit) is the prime strength of the VAT regime, this also is the fragile feature.VAT laws generally work on the principle of ‘self-governance’ as the VAT regime permits input tax credit to the business entity based on VAT invoice issued by the seller/ supplier. Herein, the essential postulation is that the seller will deposit the appropriate VAT amount with the Government. This relation-based characteristic in VAT laws permits the buyer to claim input tax credit without any need to maintain that the supplier/ seller should deposit the VAT amount and file VAT return. This VAT system may be referred to as a ‘trust-based’ VAT system. However, it’s relevant to note that in many VAT jurisdictions (which follow the trust-based system), are overwhelmed with ‘Void -trader’ fraud. ‘Void -trader’ is a type of fraud wherein the buyer claims the input tax credit, however, the supplier does not deposit the applicable VAT (and goes missing), finally damaging the Government.
To deal with the aforementioned frauds, many VAT jurisdictions have either initiated or be going to introduce in near future, ‘regime-based’ credit system that allows the input tax credit to the buyer once the seller/ supplier submits the invoices online (in the prescribed VAT portal) and deposits applicable VAT. It is applicable to note that the ‘regime-based’ credit machinery conveys its own challenges as:
a. Business entities are anticipated to demand their particular vendors to upload invoices to enable them to check the same online
b. Business entities ought to incessant settle the procurements (which may run into thousands of line items for large business entities) has come out on the Government VAT portal with their financial statements
c. Business entities should endlessly recognize omitted invoices and follow up with vendors
d. Its awkward to address and exact the manual mistakes i.e. incorrect claim of credits due to wrong returns filed by supplier
e. System may become un-responsive or come across hang-ups.
Given the aforementioned, the VAT jurisdictions require to do a cost advantage investigation, before implementation of the system-based input tax credit mechanism to make sure that the ‘ease of doing business’ continues in VAT regime.
Reverse Charge mechanism
The VAT is valid on the supply of goods or services. Further, the liability to pay VAT is on the supplier of goods or services. However, in certain cases, the liability to pay VAT is cast on ‘beneficiary’ instead of supplier of goods or services.
Reverse charge on services
VAT law, characteristically, offers that where services are received from a non-resident service provider (who does not have any place of business or presence in the VAT jurisdiction), the liability to pay VAT is on the recipient of services. This mechanism, which transmits accountability on the recipient, is referred to as ‘Reverse Charge Mechanism’. The underlying principle of RCM is to make sure a level playing field for the domestic supplier (in comparison with the non-resident supplier).
Reverse charge on goods
In the case of import of goods, the liability to pay VAT is cast on the ‘importer’ of goods. In such cases, VAT is deposited by the importer of goods together with customs duty. Further, to smooth the progress of trailing of import deal and the VAT liability thereon, the VAT registration numbers are ‘linked’ with customs code. Whilst the reason of the linking is to simplify the VAT compliances for the businesses, however, in certain cases, challenges arise as ‘importer on record’ could be the person who clears goods from customs (such as logistics company) than the actual importer of goods. Further, problems occur in decisive availability of exemption/ zero rating to certain goods (such as medical equipment) as end-use of the goods may not be resolvable at the time of import itself. Additionally, integration of the auto-settled amount of import with imports as per economics could pose challenges for business entities.
Business entity require to do..
VAT laws set down that, if input tax credit, is obtainable then the VAT liability need not be paid in cash. Thus, the reverse charge mechanism leftovers to be a revelation prerequisite for VAT return purposes unless input tax credit is not available. Given the aforementioned, the business entity needs to inspect all their procurements from non-resident entities from the perspective applicability of reverse charge. Additional, in case of a reverse charge, is applicable then the same needs to be revealed in VAT returns and VAT liability thereon needs to be deposited (if law prescribes depositing VAT liability in cash).
Look for explanation, if VAT offers choices
Any VAT system, being self-assessment regimes, entails VAT payer to take tax positions on a day to day business transactions such as:
a. Whether VAT is applicable on supplies
b. Whether the deal will meet the criteria of zero rating
c. Whether VAT levied by the vendor will be accessible as input tax credit
d. Whether the reverse charge mechanism is applicable etc.
Given many business transactions, taxpayers need to take a tax position as early.
The matter gets complex if the taxpayer needs to talk about the tax position with their customer or vendor, as in such cases, the tax position could be accepted on business coherent than legal coherent. Over a phase of time, such conclusion gets gathered and the collective risk of assumed tax positions may turn out to be substantial. Providentially, VAT jurisdictions provide for a mechanism, referred to as explanations or ‘Progress Ruling’, through which VAT payers can seek clarity on their VAT positions. To reduce the risk coverage it is worthwhile for taxpayers to recognize the big-ticket items at the earliest and seek clarifications. In the long run, this step of seeking clarifications will certainly prove to be a step in the right direction and save the business from punitive consequence.