Implementation of Goods and Service Tax in India is the biggest tax reform that tax fraternities across the world are keenly watching. The GST in India comes with several unique features like Dual Structure, Cross Empowerment, and Matching of Input taxes at transaction level, making it complex and a compliance heavy tax reform.
If GST is implemented well in India, this could be an example for other countries on how GST can be implemented in a federal structure.
There is no doubt, if GST implemented with fewer tax exemptions will result in very good tax collection to government exchequers and will reduce generation of black money and reduce tax leakages to a greater extent. In order to ensure greater control on GST and to prevent tax leakages, the government has proposed matching of tax credits at transaction level.
To capture transaction level matching, the Government has proposed a set of GST returns that a business has to file every month. A business (other than those coming under composition scheme) has to file three returns (GSTR 1, GSTR 2, & GSTR 3) every month. This will get increased by two more returns if we include mismatches in the data between the returns filed by supplier and recipient.
With these set of returns the government has made the preparation and filing of GST returns filing cumbersome and compliance heavy.
At present, where only VAT returns are filed, many small traders don’t employ a full time accountant. A part time accountant will come on periodical intervals to file VAT returns. Same is the case for VAT exempted products, where the business files an annual return once in a year.
In many micro and small enterprises there is no dedicated accounts department, sales and purchases are booked by the operating team (salesmen, warehouse keeper) or by the owner himself. Under these circumstances making a micro or small enterprises to file 3/5 set of returns a month will drive their compliance cost high.
Any tax reform should not only augment revenue to government but should also be business friendly.
The draft GST returns filing process proposes all sales to be filed in GSTR 1 on 10th of next month, purchases in GSTR 2 on 15th of next month and GSTR 3 on 20th of next month. Any mismatch between supplier GSTR 1 and customer GSTR 2 has to be rectified by GSTR1A or by GSTR 2A as the case may be. By proposing this set of compliance the government intends to match the tax credits and also want to ensure that the tax chain is not broken till it reaches the end consumer.
The GSTN has been entrusted with the responsibility of handling of huge volume of returns. The government has proposed automatic population of data based on returns filed by the suppliers and also proposes manual updation of transactions, if it is not automatically populated, making it semi- automatic.
It needs to be seen whether we will have adequate net connectivity and internet bandwidth each business from 10th to 20th for filing GST returns across India. If the dates mentioned for filing GST returns are not adhered then the business will be slapped with a late fees Rs.100/ day.
Disadvantages in Present Proposal:
The enterprise should equip itself with accounting softwares or taking the service of GST suvidha providers and there by pushing the cost of compliance.
Filing 3/5 set of returns every month and any non adherence to it will lead to levy of late fees. It will discourage entrepreneurs to continue business if they can’t afford a dedicated accountant or faced with frequent late fees.
For a businessman, filing of GST returns will take priority rather than concentrating on developing the business.
The proposed system will not prevent tax leakages in its entirety. Fake Invoices will be created after the month end for products attracting lower taxes without products actually moving. The customer receiving the invoice can also claim it as an expense, thereby reducing his profit.
Hence this proposed GST Return filing will not prevent the “Bill Trading” (only bills move and goods don’t move) in its entirety.
Also, in the present proposal, if the recipient of goods or services wants to file returns in advance he can’t do so and he needs to wait for all his suppliers to file their GSTR1. Even if the recipient wants to pre-pone his return filing and be efficient, he can’t do so because of the inefficiencies of his supplier.
We need to have a different approach which takes off the system of filing 3/5 set of returns every month, strict deadlines from 10th to 20th, at the same time helping the government in preventing tax leakages and preventing breakage of tax chain.
The alternate method to GST Returns filing is given below and this is derived from the draft rules proposed by the government. The government in its draft rules on invoicing has come up with a concept called “Invoice Reference Number” wherein when an invoice is generated; the supplier can upload the same in GSTN portal and generate Invoice Reference Number. This Invoice Reference Number was supposed to be the alternate to “Transporter Copy of Invoice”. The draft rule implies, if the Invoice Reference Number is held by a transporter then he need not want to carry the invoice.
This concept of generating “Invoice Reference Number” can be used further and it will be an alternate to cumbersome filing of 3/5 set of returns.
The proposal is,
The Invoice Reference Number has to be generated online, whenever a supply of goods or services is made to a GSTIN holder on a real time basis. Generation of Invoice Reference Number has to be made mandatory for all transactions.
The GSTN should have an app (Web based, Mobile based, etc.,) which can be used to generate the Invoice Reference Number.
Once an Invoice Reference Number is generated it will be recorded as outward supply for The details of outwards supply should be automatically made available for the recipient to check the value, quantity and other details in GSTN Portal.
If the recipient found there is a mistake then it can be rejected for resubmission. So the rejection and resubmission will happen at the earliest time rather than waiting for completion of 10thof next month. This is akin to verification of physical invoice at present followed.
The accepted input credits will be shown as pending in the ledger of recipient and credit can be taken once the supply is received at the recipient’s end. There can be an option to mention the goods receipt date in the recipient GST return.
If an invoice reference is rejected for resubmission same can be rectified before filing of GST return of the respective month or the supplier can rectify those entries in subsequent months.
Benefits of Alternate Method:
1. If we follow this the supplier is not required to upload his GSTR1, when billing is done, Invoice Reference Number can be generated by the person filling the invoice and this will be the source to record outward supplies.
2. At the recipient end, the credits will be reflected which can be taken on the month when goods! services are received by the recipient. The recipient can take credit as soon as the goods! services are received and don’t want to wait for the supplier to file his GSTR1.
3. By making Invoice Reference Number mandatory, the GSTR1A and GSTR2A can be eliminated, the recipient side GSTR2 is not required. Filing of one return is enough rather than filing 3!5 set of return.
4. The tax paid on input supplies and agreed by recipient will be shown as waiting for taking input credit and credit can be availed by the recipient on mentioning that the goods! services are This will give a good audit trail of input credit pending and credit not availed.
5. Since Invoice Reference Number is generated online throughout the month, problem of net connectivity during certain days (10thto 20th) will be reduced to a greater extent.
6. Since every transaction is uploaded as and when the transaction happens, transfer of data can be made with lower internet bandwidth.
7. The business can file the GST return from any time from 1st of next month to 20thof next month and don’t want to wait for his supplier to upload his GSTR1.
8. This will prevent generation of fake invoices to a greater extent, as the invoices are created now and then.
9. This will also improve the record keeping of business as they need to possess all details at the time of dispatch itself.
10. There is no need for a dedicated accountant for filing the monthly returns. The filing can be done by the owner or by a part time accountant.
With this filing of a single return will be sufficient, where the GST on sales made by a supplier is reflected on generation of Invoice Reference Number. The input tax credits that can be availed based on generation of Invoice Reference Number and input tax credit availed during the month for goods/ services received. This model will fit in even in case of tax credits distributed by an Input Service Distributor as well.
To conclude, some sections of business community might resist as it takes away the flexibility of generating invoices at their own pace. However this will promote self compliance among businesses, reduce cost of compliance and generate higher revenue to government with lower efforts to administrate it. The government says “One Nation, One Tax”; with the above proposal we can have “One Return for One Tax”