Businesses are prone to challenges. Every day you face one new challenge. One big challenge that Indian businesses have to face is the blocking of credit on Goods and Services Tax (GST). Businessmen need to understand how this credit issue can be resolved. Because this impacts the business operations as well as the finances.
This article focuses on this problem. We will discuss in detail how the blocked credit affects the business and finance, strategies to resolve the credit blocks and long-term consequences of GST credit block etc.
Before that here is a list of clauses under Section 17 (5) of the CGST Act. This section defines the list of purchases on which ITC cannot be claimed.
|Clause (a) (aa) (ab)
|Conveyance and Transportation
|Food, Catering, Vehicle Renting, Club and Travel
|Clause (c) (d)
|Clause ( e) (f)
|Composition and Non-Resident
|Free Sample & Lost/stolen goods
|Fraudulent ITC Claims
Business consequences of blocked GST credit
Every step you take in your business is very important. Each step can make you grow or make you fall. Blocking of GST credit can be a big obstacle for your business. It will adversely affect the business. Entrepreneurs and businessmen must understand and tackle this concern.
Business operations Affected
Business relies on these credits to offset tax paid on inputs. If this is not received then it affects the operations of the business. Small businesses face a lot as they have limited finances. This hampers their working capital
Affects timely payments to suppliers
Suppliers play an important role in the business. GST-blocked credit can impact the payments to be made to suppliers. The delay in the payments may affect trust and relationships.
The disruptions due to blocked credit can have a domino effect on the production process. Delays in getting supplies on time due to delayed payments can result in production delays. Due to this customer will not get the final product on time and he will be dissatisfied.
Financial implications of credit blockages
A business can’t run without finances. It has a very important role in business. The blocked GST credit impacts the business financially and has a direct effect on its cash flows. Here are some major financial concerns: –
Compliance Costs and Penalties
The first financial consequence of blocked credit is an increase in compliance costs and penalties. Businesses are required to maintain some set of rules and regulations. However certain complexities associated with blocked credit at times lead to errors or delays in filings. This attracts penalties.
The inability to get the tax credit results in an increase in tax liability for a business. Due to GST tax credit companies can offset the tax paid on inputs. But in the case where the blocked credit occurs, the business needs to pay more tax.
Hard to make Profits
Business runs to make a profit. But when the GST credit is blocked, the profit creation becomes a tough game. Due to the payment of high taxes, compliance costs, and penalties, businesses have to bear extra costs. This affects their profit. Profit goes down and it becomes difficult for them to earn the required profit.
Working Capital Concerns
Due to blocked credit, the cash flow of the business is affected. Business has to face the working capital concerns. This has a higher impact on small businesses that work on low margins.
Mitigating the impact of blocked credit
When the business has to face certain challenges in the form of blocked credit, the need to take the initiative to reduce the effect of the same arises. Here are certain steps that a business can take to reduce the impact of blocked credit
Regular Review and Proactive Measures
Just like you have a regular health checkup, in a similar way you need to have a regular review of your business. A regular review needs to be conducted for the compliance process and to ensure that everything going on is okay. Such a proactive step can surely reduce the occurrence of blocked credit.
Investing in a Good Accounting System
Accurate accounting records are a must for reducing the GST blocked credit. To ensure proper accounting a business shall invest in a robust accounting system. This will reduce the accounting errors and hence reduce the possibility of blocked credit.
Staying Updated with Tax Law Changes
The taxation laws keep on changing. A business must stay updated with the same. They shall adapt to the change in tax regulations and frame the strategy accordingly. If the business is aware of GST changes, then it can apply immediately to the business operations. This will help in reducing the credit blockage on GST.
Taking professional Advise
GST implications are too complicated. Businesses can take the help of professionals. Tax professionals and legal experts can help them in this regard. They can make them aware of the top reasons for credit blockage and help them take necessary action.
Strategies for Businesses Affected by Credit Blocks
For businesses facing the concerns of GST credit blocks need to implement proper strategies to overcome the challenges faced. Here are some strategies that businesses can implement to face the blocked credit challenge.
Negotiate the terms with Suppliers
The most important strategy is to negotiate with suppliers. You need to explain to the supplier about the credit blocks and how it’s impacting the cash flow. A good flexible payment arrangement can be brought out. If things are made clear to the suppliers, then they are too ready to cooperate.
Have Clear Communication with Creditors
It’s not just suppliers that a business needs to care for. They also need to see their creditors. Businesses shall inform the creditors about the blocked credit concerns and the steps taken by them to resolve them. This transparency will help in creating a good environment that will help in facing the challenges of credit blocks.
Advocate Policy Changes
At times blocked credit concern takes place due to policy issues. At such times businesses can ask for policy changes. For these owners and entrepreneurs will have to meet industry associations and relevant authorities. They can explain to them the concerns faced and even propose some solutions.
Investing in Technology and Automation
Technology can play an important role in mitigating the impact of blocked credit on business. Businesses shall invest in good accounting software that can automate accounting and compliance. This will reduce the errors and hence blocked credit cases can be reduced.
Resolving Blocked Credit Challenges
Blocked credit concerns can be resolved by taking proper steps. As a businessman or entrepreneur, it is your responsibility to resolve the blocked credit concerns. Here are certain ways to do the same.
Collaborate with Tax Professionals
When your business is faced with blocked credit concerns, one of the best things to do is connect with tax professionals. These tax professionals have in-depth knowledge of the GST rules and regulations and can help you resolve the credit blockage concern.
Understand the Reason for Credit Block
If you want to win the game you need to know its rules properly. In a similar way to avoid blocked credit, you need to understand the reason behind the credit blockage. For this, you will need to have good observation of financial transactions and compliance processes. Knowing the root cause will help the business to take proper action.
Respond to Notices on an Immediate basis
Any notices you receive for GST credit blockage shall be addressed immediately. Time-to-time responses will lead to prompt resolution. Businesses shall provide the required information and documents to bring resolution.
Implement Corrective Actions
Just identification of reasons for credit blockage is not enough. A proper implementation of the corrective actions is also needed. From rectifying errors to resolving the issues raised by tax authorities, businesses shall act on it.
Look for Alternative Solutions
If you are unable to resolve the concern directly, then you can think about alternative solutions too. For this businesses can approach ombudsman services, explore legal remedies, explore dispute resolution etc. This flexibility can increase the chances of resolving the concern.
Long-term Effects of Credit Issues on Businesses
The GST credit blockage concerns can even have long-term effects on businesses. This can have an overall impact on the health and sustainability of the business. Here are some long-term consequences of block credit on businesses.
Impaired Corporate Reputation
Credit concerns can even impact the corporate reputation of the business. Delayed payments can develop trust issues with suppliers and creditors. This can even impact the company’s image, leading to a decline in share value, customer dissatisfaction and low brand value.
Losing Customer Trust
The customer is the lifeline of any business. Without them, you cannot do the business. Credit concerns can lead to nonfulfillment of orders on time. This impacts customers’ expectations. These dissatisfied customers may give you negative reviews and even leave you and opt for products from other companies.
Credit concerns have a direct impact on the finances of the business. Late payments, penalties and higher compliance costs increase the financial burden on the business. This leads to low profits, reduces financial flexibility and impacts the growth of the business.
In the modern world staying competitive is very important. However, blocked credit can lead to a competitive disadvantage for businesses. Businesses that are struggling financially due to credit concerns may not be able to invest in research, marketing and innovative technology. This will not allow a company to compete with other companies.
The impact of blocked credit on businesses leads to various challenges that require a lot of attention and proper planning. One needs to understand the consequences of this and take proactive steps to reduce the consequences. By proper implementation of strategies and resolving credit blockage businesses can deal with blocked credit and help to create a great future.
Frequently Asked Questions
Can block credit be claimed in any circumstances?
Blocked credit cannot be claimed under any circumstances. GST laws and regulations have specified certain conditions under which input tax credits can be claimed. You can claim it in those conditions only.
How does the blocked credit impact the taxpayer’s GST liability?
The blocked credit amount can’t be used by the taxpayer to reduce their GST liability. They need to make the payment of GST on the blocked amount.
How does the blocked credit affect business operations?
Blocked credit has a direct impact on the cash flow of the business which affects the operational efficiency. It also led to an increase in working capital needs. This affects the financial health of the business and thereby impacts its operations.
What is the role of tax and legal experts in solving the GST credit block?
Tax and legal experts have good knowledge of GST regulations. They can help to know the reason behind the credit blockage and streamline the process.
How a business can stay updated about the regulatory changes in GST?
For this, the owner needs to check on tax-related news, get in touch with tax authorities, participate in industry associations and get professional help.
Who is authorised to block ITC?
As per the law, the commissioner or any officer authorized by him has the authority to block the ITC. This can be done only if he has a valid reason for fraudulently vailed ITC.
What is the Input Tax Credit under GST?
Input Tax Credit is the credit of tax paid for the inputs used in the business. These inputs can be offset against the tax liability on output supplies.
What is GST section 17 (5)?
This section provides the list of items for which ITC is blocked or ineligible.
Can a taxpayer claim ITC for a good or service used for personal consumption?
There is a specific mention in GST Section 17 (5) that a taxpayer is not allowed to claim ITC on goods and services used for personal consumption.
Who controls GST in India?
The GST Council which is a constitutional body takes care of issues related to GST in India.