Using GST for checking menace of undisclosed sales & incomes

It is a common experience that while you go for shopping, you are asked whether you need a pucca bill for your purchase or you can adjust without getting bill for your purchase. Price to be paid is higher if purchase made with pucca bill; reason being told is that taxes will be added in that price. Obviously for without bill purchase you end up paying lower price because you are told that taxes are not added hence the price is lower.

What are these taxes that shopkeeper chooses not to charge customer and thereby offers goods at lower price. Excise duty and VAT are now on the principles of Value Added Tax and under current system of Input Tax Credit provisions, these taxes provide credit of taxes even though corresponding sales are not declared and output tax is not paid on such sales. Thus while a merchant choosing not to declare his sales turnover, eats benefit of input tax credit, in that process Government loses its share of tax revenue.

Without Bill sales at a lower price are also aimed at reducing Income tax, with the help of undisclosed turnover. Such kind of undisclosed turnover by merchants on a large scale is one of the main reasons for generation of black money through a parallel economy of undisclosed turnovers.

It is with a view to curb this menace Arthakranti proposal had suggested to levy a single Banking Transaction Tax, replacing all other direct and indirect taxes. However for variety of conceptual and practical difficulties, such a blanket tax is not considered to be a viable proposal by Government. This is evident from the position, that though such a proposal is welcomed by many in the political class, even after so many years from the time, proposal was presented; it had not occupied a place in tax statutes.

It is in this backdrop that an attempt is made by me in this write-up to ascertain whether GST which is going to replace all indirect taxes in the country can offer some remedy through suitable tax deterrents.

GST is going to be a destination based consumption tax and before any goods are finally consumed, these goods pass through long chain of B2B sellers, and it is with respect to trading portion of B2B segment for any goods that GST with dual control of Centre and States on sellers, can provide better check on generation of black money through a system of deterrent tax on undisclosed turnover occurring at any of these trading stages.

Following measures can be adopted to curb the practice of undisclosed turnovers in the GST law.

1. Discouraging Without Bill Sales through Denial of Input Tax Credit on such sales

A seller under GST must be required to declare his status as to whether he is a manufacturer seller or he is a trader seller. If a legal entity is engaged in both the activities, it should be compulsory to obtain separate GST registrations for these two kind of business verticals. Distinction between these two kind of sellers in required because co-relation of purchase with sales is possible in cases of trading whereas such a co-relation is lost when inputs are processed under manufacture thereby elimination a link between purchase and sales.

For a seller registered as a Trader under GST, eligibility for ITC will be in two stages. Primary eligibility for credit will be checked by GSTN based on matching with supplier invoices. Secondary eligibility will depend upon co-relation of purchase with the sale bill generated by such trader.

A paradigm shift in current ITC provision is envisaged here, wherein credit is not given until output tax liability corresponding to such credit is acknowledged by the trader. This is not as troublesome as it appears to be for the following reasons.

Prudent merchants operate on the principles of Just in Time Inventory, so that for them stocking period is not significant, so that even if credit is allowed only when goods are sold by the trader, time gap between their purchase and credit claim will not be material to warrant additional working capital and attendant carrying costs.

Otherwise also occasion to pay output GST arises for a trader only when goods purchased are sold, so that his funds requirements will anyhow be limited to tax on his value addition. What will not be possible due to requirement of co-relation with the purchase is facility of cross credits available under current dispensation of Input Credit System. Under present system even if particular goods purchased are not sold, credit of such purchases is allowed to be set off against tax liability on sales of other goods, which really is not the intention of a system of Value Added Tax on conceptual terms.

Extent of loss to exchequer due to this relaxation can be gauged from the fact that while a merchant seller does not pay output tax on his sales by choosing to do a without bill sale, revenue lost by the Government is equal to ITC given to such a merchant. Government thus suffers on two counts, first it does not get any indirect tax on the goods sold and secondly it loses direct tax on income arising out of sales, creating black money in the process.

Co-relation with sales is not insisted under current CENVAT and State VAT provisions for administrative reasons at the end of Department and Traders. It is a prevalent thinking of both these stakeholders that establishing a link between purchase and sale though conceptually possible, poses many a practical problems at record keeping stage, which turns the whole exercise effectively impossible when volume of transactions increases to become sizeable.

However with the advent of information technology software, now a days almost all accounting systems provide ERP features wherein accounting and inventory records are integrated. Under such systems like Tally which are very widely used by average traders, co-relation of sale of any inventory item with its attendant purchases should not pose any significant problem. Accounting systems currently employed by almost all traders operating in B2B segment are capable of providing such a linkage even if there is one to many relationship between a sale bill and its corresponding purchase bills, software can easily provide co-relation between the two to the level of individual products purchased and sold.

Already such a system of co-relation has been in place in current Excise Law for Registered Dealers since last number of years. Before VAT was introduced in 2005, old Sales Tax Laws of various States, provided for requirement to produce such co-relation, before a claim for resale was allowed for a trader. This worked in a time when manual records were maintained by most of the traders and inventory records were kept in rough manner.

In today’s world when Software can handle huge database for extracting various kind of reports and when Tally like accounting software is already providing inventory linkages with purchase and sales at affordable costs, keeping Input Tax Credit according to inventory movements should not be very difficult.

Still from practical standpoint requirement for maintaining link with output GST can be restricted to those beyond certain value cap on unit rate for product say having unit rate more than Rs. 50000/- etc.

2. Tracking Sales Turnover for restriction on Tax Credit

Another variation for restriction of ITC can be implemented wherein all sales made to customers who are not GST registered should be required to be supported with their Adhar/PAN of customers. Any sales which are not backed by GST Reg. /Adhar No/PAN should call for proportionate reduction of ITC. This will ensure proper purchase reporting and thereby tax payments at the end of customers, so that gaps in turnover/income reporting can come to light from that source.

3. Adding a Reporting Requirement without changing current ITC system

Another more relaxed measure that can be adopted is to ask for reporting of Purchase to Sale Linkage Report for products in high value category, so as to continue present easy system of not insisting upon co-relation of purchases with sales. Such a report will give lot of analytical information as to industry GP trends apart from tracking individual trader’s GST payments.

4. Supplementing Legal Provisions with Physical Checks

While such a co-relation can be established only for merchants, manufacturers who are any way very small in numbers compared to traders, should be subjected to close watch through a system of surprise checking of transport vehicles carrying goods manufactured in factories to ensure whether goods loaded are properly subjected to GST. Such a system of surprise checks must be assigned to a different department (such as local police) altogether so that transparency will be maintained in the operation of checking system and will also create deterrent for compliance amongst the manufacturers from whom GST chain begins for manufactured products. A close watch on manufacturers should be supplemented with random road checking of GST documents supposed to be available with the transporters of goods given to them for transport by all kind of sellers.

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