Bengaluru: GST Council’s decision to defer proposals to relax input tax credit (ITC) rules for motor vehicles and businesses in the supply chain has given Karnataka temporary relief, with the state estimating a potential annual revenue loss of Rs 1,500 crore if the changes were implemented.Already under fiscal strain from its guarantee schemes and drought management, Karnataka had projected a loss of nearly Rs 900 crore from the proposed ITC relaxation for motor vehicles and another Rs 400 crore to Rs 500 crore from changes to ITC rules for businesses.Finance department officials said allowing ITC on passenger vehicles could encourage individuals to register personal vehicles in the name of companies to claim tax exemptions on buying and maintenance.Even individuals who do not own businesses could register vehicles in a company’s name and use them for a nominal fee, potentially reducing GST collections, the official added. Currently, passenger vehicles with 13 or fewer seats, including the driver’s seat, are not eligible for ITC.The Council also deferred a proposal to allow genuine, tax-compliant businesses to claim ITC even when an upstream supplier in the supply chain had not paid the tax. Karnataka officials estimated that such a change could cost the state another Rs 400 crore to Rs 500 crore annually.“Had the decision been taken to allow the last person in the supply chain to claim ITC even if the original supplier had not paid the tax, it would have led to substantial revenue losses because of a lack of accountability,” an official said.Maharashtra chief minister Devendra Fadnavis reportedly raised strong objections at the Council meeting, questioning how the system would prevent fraudulent ITC claims if genuine taxpayers were allowed to claim credits despite defaults by suppliers.“Because of this restriction on ITC, there is currently some deterrence to ensure that the original supplier keeps the supply chain compliant,” an official said.The Council has referred both proposals to the officers’ committee for further examination. The move gives Karnataka a reprieve of at least three to four months, during which the state can avoid the potential revenue impact while the proposals are reconsidered.
