Mumbai: Many companies that reported an increase in their indirect tax outgo due to a steep jump in their import costs after the Covid pandemic fear that when things go back to normal, they could face intense scrutiny from the taxman.

This is mainly because the Goods and Services Tax (GST) is pegged to the cost of the goods imported.

In most cases, the costs of the importers have gone up by anywhere around 10 per cent to 20 per cent.

People in the know say that when the cost of goods imported jump by 10 per cent so does the GST levied on that.

Many fear that when the situation goes back to normal indirect tax officials could still challenge the valuation of the goods imported—as in most cases there are no verifiable benchmark for prices of most imports.

In most cases the steep jump in the costs is due to the disruption in global supply chains, say industry trackers.

“The disruptions caused due to the pandemic on the supply chains and demand patterns have had an impact on the import costs which have gone up in some cases- these have had a consequential impact on the import duty and GST payments as well. Businesses would hope that such abnormal cost patterns are not treated as normative by the tax authorities in future as that could lead to several contentious issues cropping up for importers,” said M.S. Mani, Partner, Deloitte India.

Under the GST framework a tax official could challenge the valuation of the goods imported. “Valuation of something like gold or oil is never challenged as there is a global market where the prices are set and can be verified. But for most of the other goods, some specialised chemicals or clothes or shoes imported to India, valuations could be challenged,” said a tax expert.

GST has something called an open market pricing for related party transactions—that is transactions between group companies. Due to open market pricing for the related party transactions; the goods and services are subject to specific valuation rules.

Insiders point out that in many cases the companies are not disclosing the precise valuation of the goods they are importing. The tax department, said one of the persons with direct knowledge of the matter, would be scrutinising such imports in the coming weeks as this is leading to tax leakage.

Tax experts say that the fluctuations in the cost of imports could also lead to tax demands from the direct tax department. This is mainly because the government has now started comparing data filed by companies with different departments to detect discrepancies and check whether there’s been any leakage in tax collected, raising the prospect of even greater scrutiny, said people with knowledge of the matter. GST returns, income tax filings and transfer pricing submissions would be analysed and synchronised to find discrepancies.

Tax experts said there will be several implications for companies, mainly multinationals, and that imports by companies would be scrutinised.

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