Ways to get taxpayers back into the system

The first nine months after the introduction of the Goods and Services Tax (GST) were chaotic, to say the least. The GST portal was functioning moodily, tax rates kept on being tinkered with, and rules such as reverse charge on purchases were introduced only to be withdrawn.

This was to be expected as the concept of GST was radical in that it subsumed many taxes across the country and focused its attention on a word called supply which was not even defined in the laws.

Hence, it should come as no surprise that the first report of the Comptroller and Auditor General of India (CAG) on the nine months of GST has many adverse comments. The report states that one significant area where the full potential of GST roll out has not been achieved is the introduction of the simplified tax compliance regime.

Even after two years of roll out of GST, system validated Input Tax Credit through “invoice matching” is not in place and non- intrusive e-tax system still remains elusive. The complexity of return mechanism and the technical glitches resulted in roll back of invoice-matching, rendering the system prone to ITC frauds.
The report states that on the whole, the envisaged GST tax compliance system is non-functional. The deficiencies in the GST system also point to a serious lack of coordination between the executive and the developers. On revenues, the report states that the growth of indirect taxes slowed down to 5.80% in 2017-18 over 2016-17 while this growth rate was 21.33% during 2016-17.

During 2017-18, the Government of India resorted to devolution of IGST year-end balance to the states as per Finance Commission formula, which is in contravention of the provisions of the Constitution and the IGST Act. This also has the impact of distribution of funds to the states on a completely different basis instead of ‘Place of Supply’ concept as envisaged in the IGST Act.

Post implementation of GST, the Centre’s revenue on goods and services registered a decline of 10% in 2017-18 as compared to revenue of subsumed taxes in 2016-17. There was a short transfer of Rs 6,466 crore of GST compensation cess to the Public Account during 2017-18.

On the GST returns, the report states that while it was expected that compliance would improve as the system would stabilise, all returns being filed showed a declining trend of filing from April, 2018 to December, 2018.

The filing percentage of GSTR-1 returns (monthly returns on outward supplies) were throughout less in comparison to the corresponding filing of GSTR-3B returns (summary self-assessed return). The introduction of GSTR-3B resulted in filing of returns with income tax credit (ITC) claims which could not be verified and it appears to have disincentivised filing of even GSTR-1.

Since filing of GSTR-1 is mandatory, short-filing is an area of concern and needs to be addressed. The GSTR-3B being only a summary return, short-filing of GSTR-1 implied that the tax departments did not have complete invoice level details as filed by the suppliers, which could be used to verify details given in GSTR-3B or to arrive at turnover. All the IGST settlement ledgers were not being generated due to non-implementation of corresponding GST modules like imports and appeals.

This, coupled with the inaccuracies in the settlement algorithm and limitation of the GSTR-3B return in capturing all the information required for settlement, had a bearing on the settlement of funds to the Centre and various states. The incomplete IGST ledgers were partly responsible for Rs 2,11,688 crore of IGST balance remaining unsettled during 2017-18. Duplicate records were noticed in 6,748 cases in five settlement ledgers, leading to inaccurate settlement of Rs 416.07 crore IGST funds for the period from July 2017 to July 2018.

Incorrect settlement of IGST amounting to Rs 359.46 crore during the period from July 2017 to July 2018 was noticed because of erroneous entries in settlement ledgers due to the algorithm picking up entries from wrong category of taxpayers. Unrealistic erroneous claim of ITC of IGST by one taxpayer, representing 79% of total ITC claim by all taxpayers for a month, was allowed by the system, exposing the vulnerability of the system to fraudulent ITC claims.The GST Council should not look upon the report of the CAG as a critique of the system - it should look to the document as an advisory note on how to correct the systemic flaws in GST, some of which are continuing even today.

e-invoicing

The Central Board of Indirect Taxes and Customs (CBIC) should ensure that the new system of e-invoicing works perfectly when it is introduced in phases later this year. The GST Council should also layout a plan of action to reimburse the state governments for their loss of taxes due to GST.

Though there is an Act that governs this, the report of the CAG provides evidence that the Act is not being followed in letter and spirit. Apart from a few items like cement, GST rates are in a sweet spot now and there is no necessity to keep on tinkering with the rates. Monthly GST revenues remain a concern. The automobile sector is on the verge of getting GST concessions from the government - a move that could have further impact on revenues. Statistics prove that while some taxpayers have gone out of the GST system under the excuse that it is too complicated, others have remained in the system but are not filing their returns regularly.

The only way to get these taxpayers back into the system is to have simple rates of tax, easy filing procedures and making the right noises that the department is not terrorising anyone. The ITC-related frauds tend to continue to trouble the collections of the department. The reason such frauds occur is because of the ease with which one can claim ITC today - only a monetary value needs to be put into a column in the Form GSTR 3B. The audit report of the CAG gives plenty of food for thought to GST Council/CBIC.

(The writer is a tax expert based in Bengaluru)