Misconception 01:

Large number of taxpayers would be affected.

Reality:

The rule provides for various exemptions like exporters, suppliers of goods of inverted duty structure, taxpayers having a footprint in the income tax database etc. It is expected that this rule would be applicable to less than 0.5% of total taxpayers base of 1.2 crore. The rule clearly identifies where the risk to revenue is high and imposes deterrence to the fraudsters in a multi-layered fraud of passing fake ITC. This rule would help to control such fraudsters, who issue fake invoices and show high turnovers but have no financial credibility and flee after misusing ITC without payment of any tax liability in cash.

Misconception 02:

The requirement of cash payment of 1% liability will create huge burden on small businesses and will increase their working capital requirement.

Reality:

The cash payment of 1% is to be calculated on the tax liability in a month and not turnover of the respective month. In fact, it amounts to only 0.01% of turnover. For example,, if a dealer has made sale of Rs. 1 crore of the goods whose tax rate is 12% and if he is discharging his tax liability more than 99% through ITC, then he has to pay only Rs 12,000 under this rule. On the other hand, a composition dealer would have paid Rs. 1 lakh in cash with this volume of sale.

Misconception 03:

This rule adversely affects small and medium enterprises.

Reality:

The new provision which restricts the use of ITC for discharging output liability is applicable to the registered person whose value of taxable supply other than exempt supply and export in a month exceeds Rs. 50 lakh - that means those annual whose turnover is more than Rs. 6 crore. Therefore, the rule does not apply to micro and small businessess and composition dealers.

Misconception 04:

All the registered persons will be required to pay 1% cash liability.

Reality:

The rule is applicable to only those registered persons whose value of taxable supply, other than exempt supply and export, in a month exceeds Rs. 50 lakh - that means those whose annual turnover is more than Rs. 6 Crore. This rule is also not applicable in the cases where the registered person:

1. has deposited more than Rs. 1 lakh as income tax in each of the last two years.
2. has received a refund of more than Rs. 1 lakh in the preceding financial year on account of export or inverted tax structure.
3. has paid output tax through cash in excess of 1% of the total output tax liability, applied cumulatively, up to the month in the current financial year.
4. is a government department, PSU local authorities, statutory body..

Misconception 05:

This rule adversely affects genuine taxpayers.

Reality:

This rule is only applicable to taxpayer who have taxable supplies or more than Rs. 50 lakh in a month, which amounts to an annual turnover of more than Rs. 6 crore. Besides, the registered persons failing in any of the exempted category including paying Rs. 1 lakh as income tax in each of the last two financial year or having received refund for more than Rs. 1 lakh in the previous year on account of export or inverted duty structure etc are also out of the purview of this rule. With this exemption and condition and precise targeting, the requirement of mandatory payment of at least 1% of the tax liability in cash would apply only to risky or suspicious taxpayer and genuine taxpayers would remain excluded.