The government's decision on mandatory payment of at least 1 per cent of GST tax liability in cash will only apply to establishments having an annual turnover of Rs 6 crore and the new rule will not apply to micro and small businesses, and composition dealers, finance ministry sources said on Sunday.

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Based on the recommendations of the GST Law Committee, the government has notified new indirect tax rules that makes cash payment of 1 per cent of GST tax liability mandatory for businesses whose taxable supply value exceeds Rs 50 lakh in a month. This change will come into effect from January 1, 2021.

The new rules stoked fears that the mandatory cash payment will adversely affect small businesses and will increase their working capital requirement.

"Contrary to what is being fed, the new rule will only help to curb the menace of of fake ITC availment and impact only risky and suspicious dealers or fly-by-night operators. It will in no way disturb honest taxpayers," said one of the sources quoted above.

Apart from turnover based exemption, the cash payment rule will also not apply in the cases the registered person deposited more than Rs 1 lakh as Income Tax in each of the last two years and where such person has received a refund of more than Rs 1 lakh in the preceding financial year on account of export or inverted tax structure. Also, the cash rule is not applicable to government department, PSU and local authority.

Explaining the reason for introducing this rule, a highly placed Finance Ministry source said that a legitimate business runs for profit and a minimum value addition is expected from them. It is only where a lot of fake credit is used that no tax payment in cash is made. Further, dummy companies which generate fake ITC or are used to be a layer in multi-layer fake credit flow pays no tax in cash.

"This provision is a very smart rule against fraudster and would not affect any genuine business entities or Ease of Doing Business in any manner," said Finance Ministry sources.

With regard to turnover based exemption, the finance ministry has clarified only those businesses which have turnover more than Rs 6 Crore and pay more than 99 per cent of its tax through ITC (input tax credit) and yet pay less than Rs 1 lakh income tax in a year - will fall in the risky category under this rule.

The new rule is expected to control fake invoices fraudsters who avail and pass on ITC by dummy, fake and dormant entities which show high turnovers, but have no financial credibility and flee after issuing fake invoices and misusing ITC.

The seriousness of this menace to GST ecosystem may even be understood by the fact that in the recent nationwide drive against GST fake invoice frauds that was launched in the second week of November and still going on, has resulted in the arrest of more than 175 fraudsters and more than 1,800 cases are booked against 8,000 fake entities in just 40/45 days.