Goods and Services Tax (GST) – one of most important tax reforms post-independence is proposed to be implemented in India consolidating all indirect taxes under one umbrella – a single system of taxation and help Indian businesses become competitive and at the same time compliant. The GST is expected to enhance India’s trade competitiveness by eliminating cascading taxes and transform India’s economy into a single ‘common market’. GST will simplify the current tax structure and broaden the tax base, resulting in a potential boost to the country’s GDP by 0.9 to 1.7 percent. GST is also expected to increase tax compliance in India which has no good track record as of now.

In general, compliance means conforming to a rule, such as a specification, policy, standard or law. Tax compliance means abiding by all tax laws – making tax payments and producing and submitting complete information as required to the tax authorities on time and in the required formats. Tax noncompliance is a range of activities that are unfavorable to a state’s tax system. This may include invalidate tax avoidance which is technically legal but in violation of the spirit of the tax code, and tax evasion which is the criminal non-payment or non-adherence and illegal misreporting of tax liabilities.

Addressing at the Enforcement Day celebrations recently, Finance Minister Arun Jaitley said “We are moving from a developing state to a developed state. As we move from a developing economy to developed economy, we will also be moving to a voluntary tax compliant society.”  Further he added “Non-compliance of tax laws is both against public interest and national interest.”

However on the other side many people think that implementation of GST would result in increase in compliance complexity, burden and cost.

Let us discuss in this paper how GST enables better tax compliance, willingness of taxpayers to comply with a tax system and make the country move towards tax compliant society.

Multiple Taxes to Single Unified Tax

Under the current tax system, multiple taxes and non-uniform tax laws across the country have proven to be complex, costly and burdensome for businesses operating across multiple states. Businesses have to keep different tax books in different states for filing return for various taxes like VAT, Excise, Service Tax, other local taxes etc in the present taxation regime. It is also puzzling about chargeability, rates and points of taxation of excise duty, service tax, VAT / CST.  Point of taxation or event of taxation is different for different statues of taxes like excise duty levied on manufacturing, VAT / CST on sales, service tax on services rendered. The rates and valuation rules are also different for different taxes.

However GST, which is a single comprehensive indirect tax levied on the supply of goods and services, will reduce the burden of multiple taxes, procedural compliances, greatly decrease paperwork, and remove tax barriers such as check posts on state borders. Reduced tax complexities may lead to increased compliance. Simple and clear provisions in GST expected to increase compliance. For example disputes related to manufacturing (deciding whether an item is manufactured good or not), disputes related to works contract / job work (deciding applicability of state and central taxes), disputes related IT / Software products (dual taxability of VAT & Service Tax) etc will be eliminated under GST leading to more clarity and compliance.

Tax compliance, self-assessment:

Like the present indirect tax system, GST also provides for self-assessment to facilitate easy compliance and payment of taxes. Every registered taxable person shall himself assess the taxes payable and furnish a return for each tax period. This means GST continues to promote self-assessment just like the Excise, VAT and Service Tax under current tax regime. GST however relay more on automation – digital filling, tracing, correcting (if any mismatches) and controlling. This will improve compliance.

Mandatory Payment of Taxes & Filling of Returns :

For B2B supplies, all invoices (line item wise), whether Intra-state or Interstate supplies, will have to be uploaded by the supplier in GSTR-1. In B2C supplies, uploading in general may not be required as the buyer will not be taking ITC. However still in order to implement the destination based principle, invoices of value more than Rs.2.5 lacs in inter-state B2C supplies will have to be uploaded. For inter-state invoices below Rs. 2.5 lacs and all intra-state invoices, state wise summary will be sufficient. Similarly GSTR -2 is required to be filed by the recipient giving the details of receipts. Mandatory filling of return is required because ITC will be taken by the recipient; invoice matching is required to be done. In case return is not filled (filling return not allowed unless corresponding tax payment is made) Input Tax Credit (ITC) is not allowed to the recipient.  This compels both supplier and recipient to be tax compliant.

Moreover in case tax return is not filled for any previous month further filling of return for the current month will not be allowed unless the deficiency cleared. This makes tax returns filling regularly and timely a habit and inbuilt system of the businesses.

Provision of Auto-population :

There are many provisions made in the system for auto-population of the details thereby removing the need for redundant and repeated entries and simplifying the filling process. For example a large part of GSTR-2 will be auto-populated (brought into from GSTR-1) on the basis of the details furnished by the counterparty supplier in his GSTR-1. (there are some details that only recipient can fill like details of imports, details of purchases from non-registered or composition suppliers and exempt/non-GST/nil GST supplies etc). Similarly summary details of both GSTR -1 & GSTR-2 are auto-populated into GSTR-3 (monthly return). Continuing in this process, GSTR-3 details are auto-populated into GSTR-9 (annual return). These will greatly relief the tax payer for easy filling and complying with statute.

Self-Regulated Compliance : Concept of Mismatch

GST is introducing a novel concept of “Auto-Notified”, “Mismatch” mechanism. If invoices details in GSTR-2 (return filed by recipient) do not match with invoices details in counter-party GSTR-1 (return filled by supplier), then such mismatch shall be automatically notified by the system to both the supplier and recipient. Mismatch can be because of two reasons. First, it could be due to mistake at the side of the recipient, and in such a case, the recipient himself make such correction. Secondly, it could be possible that the said invoice was issued by supplier but he did not upload it and pay tax on it.  If the mismatch continues even after it is made known to both and still it is not rectified, in such a case, the ITC availed by the recipient would be added to his output tax liability (means debited) with also liability of payment of interest thereon.  In short, all mismatches will lead to proceedings if the supplier has made a supply but not paid tax on it and / or not filed the returns. This is auto-regulated mismatch mechanism giving ample opportunity to both supplier and recipient to mutually resolve the issue themselves or to face liability by the recipient. Since the recipient suffers because of default on the part of supplier, the recipient forces the supplier to be tax compliant.

However, once the mismatch is rectified by the supplier by declaring the details of the invoices or debit notes, the said amount can be reclaimed by way of reducing the output tax liability during the subsequent tax period. Similar provisions have also been made in respect of the credit notes issued by the supplier.

Also auto-check provisions are made to identify fraudulent practices. In case the system detects ITC being taken on the same document more than once (duplication of claim), the amount of such credit would be added to the output tax liability of the recipient in the return.

By making these provisions to rectify immediately (maximum of two months), the deficiencies and defaults are filtered and will not drag to pile up for months and years together, thereby minimizing litigations and improve compliances.

GST Compliance Rating

Presently, there is no system of compliance rating under any tax law in India. GST compliance rating is a new concept. Every taxable person irrespective of its nature or size or turnover shall be assigned a GST compliance rating score by the Government based on his record of compliance with the provisions of GST Act. The compliance rating score may be determined on the basis of such parameters as may be prescribed and may be updated at periodic intervals and intimated to the registered person and also placed in the public domain. The parameters and criteria as well as methodology shall be prescribed by way of rules. Since the compliance ratings would be placed in public domain, businesses or dealers would be able to take informed decision to deal with the lesser complaint taxable person. A highly rated taxable person would be preferred over others. It would also add to efficiency of transactions, timely input tax credit and lessee hurdles in reconciliations. It would also add to organization’s reputation large organization including PSU’s may prefer to deal with better rated suppliers / vendors.  This will lead to healthy competition for better compliance rating score for sustaining and improving business performance and market reputation.

Reverse Charge Mechanism – Tracts Transactions of Even the Unregistered Dealer

Reverse charge, where the recipient is liable to pay tax, is common to many countries like Canada where it is applicable on imports of services and intangible properties. Normally, the supplier pays the tax on supply. In certain cases, the receiver becomes liable to pay the tax, i.e., the chargeability gets reversed which is why it is called reverse charge.

In India, this is a partly new concept introduced under GST.  The purpose of this charge is to increase tax compliance and tax revenues. Earlier, the government was unable to collect service tax from various unorganized sectors. The concept of reverse charge mechanism is already present in service tax. In GST regime, reverse charge shall be applicable for both services as well as goods and expanded to cover situations like unregistered dealer supplying to a registered dealer. In such cases the registered dealer has to pay tax on reverse charge mechanism and of course allowed to take input tax credit if eligible. All the transactions of even the unregistered dealer shall be tracked to know whether he crossed the threshold limit to registering and paying tax. Compliances and tax collections will therefore be increased through reverse charge mechanism.

GST Network  – Improved Access, Visibility and Control:

GST Network (GSTN) the IT infrastructure backbone that powers the new indirect tax system, is geared to accept up to three billion invoices a month from 8.5 million tax payers. The portal becomes the touch point for tax payer registration, invoice up loading, tax payment, getting input tax credit, maintaining the cash ledger and liability register, generating MIS reports for tax payer, tax officials and other stakeholders and keeping track of status of returns.

The automated platform of GST Network provides complete visibility, access, monitor and control across your entire GST transactions. Automated notifications in case of mismatch, auto-population and such other provisions help achieving greater accuracy, risk tracking and control, whilst improving efficiencies.

Ease of Doing Business – Direct Correlation with Better Compliance :

GST is going to change the way of doing business for taxpayers as well as tax officers. Information technology is going to govern things rather than these officers. The taxpayers and the officer’s interaction will all be through the Online GSTN Ecosystem now. However, that would not be the only way for interacting with the GST system. GST ecosystem common platform will allow the taxpayer to have a choice of third-party applications, which will provide all user interfaces and convenience via desktops, mobiles, iPads, handhelds, etc. All such applications are expected to be developed by third-party service providers who have been given a generic name, GST Suvidha Provider, or GSP. GSPs will facilitate the use of GSTN system to the businesses to file the GST returns, match sales and purchase invoices to settle tax credits. The GSPs will hence help secure GSTN from direct exposure to users on internet as well as distribute the load in a large economy like India.

Also provisions are made to file through an offline excel form provided by GST Network. If someone uses this form for keeping record of purchase and sales, then he can use this for filing return. Some other ease of doing business provisions are : businesses within one state under one PAN only one registration is required (instead of like in the present practice different manufacturing units need take different excise registrations even operating in the same state); No Harmonized System of Nomenclature (HSN) code is required for business turnover up to  Rs 1.5 crore etc

GST if implemented rightly, the benefits of simplified compliance, technological administration, and uniform process will contribute significantly to the “Ease of Doing Business” in India. Ease of doing business has direct correlation with better compliance.

GST – Making Shift from Un-organized to Organized Sector:

An important fallout of GST could be shift from un-organized to organized segment. It will shift business from the un-organized to the organized segment and improve efficiency, since the cost and compliance burdens are shifted to recipient (reverse charge payment and its corresponding documentation work in case of supplies from un-registered supplier). Costs of supplies from un-registered supplier and supplies from persons opting composition scheme are also increases as in the value chain, input tax credit is not available to these suppliers. So the organized registered tax payer always prefers to get supplies from registered suppliers only avoiding un-registered suppliers.

This will force all the un-organized and un-registered suppliers to get registered and shift to tax regime or to perish.  However India has significant presence of the un-organized sector (86% work for it) is a real challenge. But over a short period shift is foreseen because of market forces compulsions.

GST is likely revolutionize the way India does business – simplicity, self-governing and increased compliance, improved competitiveness sets it on path to become one of world’s most evolved and business-friendly countries and help propel GDP in the years to come.

(Author can be reached at [email protected])

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June 2021