The GST Council has deferred two key proposals related to input tax credit (ITC), including a proposed change to Section 16(2) concerning tax payment by suppliers and a proposal to allow ITC on motor vehicles under Section 17(5), sources told NDTV Profit.
The Council also took up a proposal to reduce the GST rate applicable on Merchant Discount Rate (MDR) for UPI transactions, with most states raising concerns over the existing 18% levy, people in the know told NDTV Profit. Apart from the two deferred ITC proposals, the GST Council has approved the remaining proposals on its agenda.
Section 16(2) Proposal Sent To Group Of Ministers
The proposal to amend Section 16(2) of the GST Act was deferred amid concerns over ensuring that the seller has actually paid the tax to the government and the possibility of misuse through fake billing and fraudulent ITC claims. The proposal has now been referred to a Group of Ministers for further consideration.
Section 16(2) sets out conditions that a taxpayer has to meet to claim ITC. One of the key conditions is that the tax charged on a supply should have actually been paid to the government.
The proposed changes were aimed at addressing difficulties faced by genuine taxpayers when a supplier fails to deposit the tax. However, concerns around fake invoices and wrongful ITC claims have led the Council to seek a more detailed examination before approving the change.
ITC On Motor Vehicles Also Deferred
The Council also deferred the proposal to allow ITC claims on motor vehicles under Section 17(5). The section contains provisions restricting ITC on specified goods and services, including certain motor vehicles, subject to prescribed exceptions. The proposed relaxation would have widened the scope for businesses to claim credit on motor vehicles.
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The proposal has been deferred for further consideration, meaning businesses will have to wait for clarity on whether and how the existing restrictions will be relaxed.
UPI MDR: GST Council Takes Up Rate Cut Proposal
The GST Council also took up a proposal to reduce the GST on UPI Merchant Discount Rate from the current 18% to 5%. Most states raised concerns over the 18% GST on UPI MDR, particularly as the new MDR framework is set to introduce charges on specified higher-value merchant transactions.
The proposal to cut the GST rate to 5% comes at a crucial time for India’s digital payments ecosystem. The new UPI framework provides for an MDR of 0.4% on specified person-to-merchant transactions above Rs 2,000, with certain caps and exemptions. Around 96% of person-to-merchant UPI transactions are expected to remain unaffected, according to the government.
The GST on MDR is currently 18%, although GST-registered businesses can claim the tax as input credit. Concerns have been raised over the impact on merchants, particularly those who cannot claim ITC.
The GST Council’s consideration of a rate cut therefore assumes significance as the government seeks to limit the additional tax burden associated with the introduction of MDR.
The Council’s discussion also comes amid uncertainty over the timing of the new MDR framework. The rollout, initially scheduled for October 15, is now likely to be deferred to January 1, 2027, according to reports, although the framework itself is not proposed to change.