Can India be inspired by Finland’s VAT loan?
Nearly three months into the world’s biggest nationwide lockdown, India continues to see a rise in the number of Coronavirus positive cases. But it’s not just the troubling pandemic victim numbers that are a cause for concern. With nearly two months of no work, businesses are bleeding out and there is an urgent need for working capital.
While the Centre has announced much appreciated COVID-19 relief measures including collateral free loans, accelerated refunds and extended deadlines for filing their GST returns, the concern of decreasing working capital and liquidity is alarming a major chunk of businesses in the country. India is not alone in this economic crisis. A majority of countries around the world are facing a similar financial situation and like India, many have announced relief measures for their taxpayers.
One such measure that has focused specifically on that taxpayer’s urgent need for working capital has been devised by Finland. In April 2020, Finland proposed the introduction of Value Added Tax (VAT) loans.
What is a VAT loan?
The VAT loan is a revised payment arrangement and payment deferral mechanism that has been proposed by the Government of Finland in wake of the financial difficulties faced due to the Coronavirus pandemic. Under this proposal, there is a possibility for companies to get a VAT loan on a nominal interest fee and a repayment of VAT refunds for a short term which can later be returned in instalments.
According to this proposal, companies can request for the VAT that they had paid in the first quarter of 2020. This amount can be refunded to the taxpayer as a loan. By requesting for a VAT loan, the taxpayer, in a nutshell, is requesting for the cancellation of its VAT payments. These VAT payments therefore become unpaid taxes to which a payment arrangement with eased terms will be applied along with an annual interest rate of 3%.
This brings us to an important question. Can India be inspired by Finland’s reform measure? Can there be more than one use of input tax credit? Can there be the possibility of a GST loan?
If there were to be a GST loan -
India could learn a thing or two and take a leaf from Finland’s book to devise a deferred payment mechanism and get creative with the usage of GST collected and input tax credit deposits sitting in the taxpayer’s electronic cash ledger. A deferred payment mechanism would highly benefit MSMEs and allow them to float in this difficult economic period. At present, a substantial credit amount of the goods and services tax is lying in the electronic cash ledgers of businesses and is meant to be adjusted against GST payable by businesses on their monthly sales. As businesses have come to a standstill due to the lockdown it is quite possible that these businesses will be able to pick up pace only after a few months. In the meantime, these credits are just sitting there gathering virtual dust. Is it possible to use these credits as a loan?
The GST credit could be converted into non-transferrable e-certificates and shared with respective business owners and banks could lend money to these businesses against these certificates. It’s basically turning your credit into collateral. We could think of this deferred mechanism as a short term loan of 18 to 24 months where the usage of input tax credit claimed and collected is not limited to payment of output tax liability but can be deposited in a GST loan account and can be used as working capital by the taxpayer and can be paid back with a nominal interest fee. Additionally, anyone availing of such a loan will also pay GST on their incremental monthly sales thereby creating more liquidity for the Centre, which would have otherwise been claimed against input credit.
A proposal like a GST loan might stand the potential to help a major chunk of MSMEs impacted by the economic crisis get back on their feet.
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