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Large companies fear losing out on GST credit if vendors, suppliers go bankrupt due to Covid crisis

Large companies fear losing out on GST credit if vendors, suppliers go bankrupt due to Covid crisis

With many small and medium enterprises staring at bankruptcy or severe business disruption due to the Covid-19 crisis, large companies that buy raw material and products from them now have to deal with a new problem: denial of credits if the vendor defaults on paying goods and services tax.

According to the GST framework, large companies cannot claim credits unless their suppliers and vendors have paid the tax. Section 16 of the GST law says that if a vendor does not pay GST to the government, input tax credit will be denied to the buyer.

Companies with a large supplier base across sectors are now reaching out to their vendors to check if there is a possibility of a default from their side.

“The additional liability cast on businesses for ensuring payment of tax by the supplier has been a rising concern since inception because of the practical difficulties in verifying the same and the financial burden even though the tax is paid to vendors,” said Abhishek Jain, a tax partner at EY. “This obligation has drawn attention in these difficult times owing to apprehensions of defaults by vendors with the currently spread financial flu.”

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