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GST: Challenges in input tax credit

GST will enable a seamless flow of credit to happen. However there are certain challenges which arise in terms of the input tax credit because of the way the entire supply chain is structured.

Today there are service providers in the manufacturing chain who are job workers, processors, knitters etc. In the past there was zero tax on the services that they provided and now a tax of 18 per cent has been proposed.

The industry would like the rate of tax to be payable on job workers, knitters and processors to come down from 18 per cent to five per cent. So the benefits that are due to come due to lowering of the tax rate at five per cent can be passed on to the end consumer and the amount of input tax credit that would be left behind actually reduces back to the original level.

There are two aspects to it. One is a state forward savings which comes in because of any reduction that has happened in the effective tax rate. Two, there is a significant amount of opportunity to optimise and bring in efficiency in the supply chain which could lead to a reduction in the cost.