Report No.11 of 2019 – Compliance Audit of Union Government, Department of Revenue (Indirect Taxes – Goods and Services Tax)
This is the first Audit Report of CAG on Goods and Services Tax (GST), prepared on the basis of audits conducted during the year 2018-19. The Report acknowledges the magnitude of the tax reform that GST has been and the efforts of all the stakeholders, including the businesses, in transiting to this system. The gaps / shortcomings have been pointed out in the spirit of constructive suggestions to realise the full potential of this major reform.
This report has four chapters, the details of which have been given below:
Chapter I gives an overview of the features of GST including the GST returns mechanism and the status of implementation of GST. This chapter discusses the one significant area viz. the roll out of the simplified tax compliance regime, where the full potential of GST roll out has not been achieved.
Chapter II deals with the analysis of GST revenue of the Government of India, accounting of IGST and the return filing trends.
Chapter III contains the results of our IT Audit of GSTN covering Registration and Payment modules and IGST settlement reports. The key findings include the failure to map business rules correctly and the absence of key validations in Registration module, operational deficiencies in payments module and the deficiencies in IGST settlement reports.
Chapter IV contains the results of Compliance audit of GST covering transitional credits, registrations and refunds. In the absence of access to GST data, the conclusions in this chapter on compliance audit were perforce based on limited audits carried out in the field. However, the gamut of issues brought out even in this limited audit point to serious systemic deficiencies that need to be addressed by the department.
Report No. 11 of 2019 (Indirect Taxes – Goods and Services Tax)
Chapter I : Implementation of Goods and Services Tax (GST)
− GST was rolled out with effect from 1 July 2017 with the objectives of reducing tax cascading, ushering in a common market for goods and services and bringing in a simplified, self-regulating and non-intrusive tax compliance regime.
− The roll out of GST has been a landmark achievement of the Government with respect to unifying multiple central and state taxes barring a few goods / sectors and availability of Input Tax Credit (ITC) across the entire value chain. Multiplicity of tax rates has also been eliminated to a large extent. The objective of roll out of single IT based interface for taxpayer has also been achieved to some extent.
− One significant area where the full potential of GST roll out has not been achieved is the roll out of the simplified tax compliance regime.
Chapter II : Revenue and return filing trends
Chapter III : IT audit of GSTN
In 16 cases, the key validations / functionalities as existing in the rolled out modules were not found aligned to the applicable provisions. Of these 16 cases, the required validation was not included in the Software Requirement Specification (SRS) itself in seven cases, the validations were not built-in even though SRS was correctly framed in eight cases and the SRS provision included a condition not prescribed in the Act in one case.
System validations were not aligned to the provisions of the GST Acts and Rules, leaving the following crucial gaps in GST Registration module:-
The payment module, despite being in operation since 1 July 2017, was fraught with operational deficiencies like
In a system with automated interface between the IT applications of the banks and GST portal, there should be no scope for errors such as invalid GSTIN and expiry of CPIN leading to non-reconciliation of GST receipts.
IGST Settlement reports
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 5 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 per cent 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.
System design deficiencies
Business Continuity and Change Management
Business Continuity Policy was not finalised and only Disaster Recovery Plan had been in place.
Lack of a systemic approach to change management, coupled with some of the deficiencies pointed by this audit remaining unaddressed even after GSTN reported corrective action, indicated the crucial risks existing in the application running on the GST portal.
To sum up the IT Audit findings:
While acknowledging that GST is a completely new system being developed, in view of its magnitude and Pan-India impact, it is all the more necessary that due care is taken both in development and in testing of the system before roll out. The failure to map business rules correctly and the absence of key validations in the rolled out system points to inadequacies in the functioning of GSTN.
The issues brought out in IT audit also pointed towards the need for GSTN to re-examine prioritisation of development of various functionalities, strengthen their root cause analysis and testing process to ensure that critical deficiencies in application are detected and rectified before rollout to public. The role of the executive in UAT / SRS sign off also needs to be re-examined.
The problem of accumulation of IGST balance due to unavailable IGST settlement reports should be resolved on priority to minimize the need for resorting to ad hoc apportionment of unsettled IGST, to be adjusted against future apportionments due to the States.
Chapter IV : Compliance audit of GST
The system of payment and settlement of tax that was envisaged for GST was based on one hundred per cent invoice-matching and availlment of input tax credit, as well as settlement of IGST on the basis of invoice-matching. Neither is possible as of now, as an invoice-matching system has not kicked-in. Invoice-matching is the critical requirement that would yield the full benefits of this major tax reform. It would protect the tax revenues of both the Centre and the States, it would lead to proper settlement of IGST and would minimise, if not eliminate, the tax official-assessee interface. In fact, even “assessment” in the sense understood in the manual system may no longer be necessary (returns themselves can be generated by a system that matches invoices); and cases of evasion etc., can be traced by applying analytical tools and AI to the massive data that crores of invoices generate.