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GST Compliance: Win Some, Lose Some

GST Compliance: Win Some, Lose Some
Finance Minister Nirmala Sitharaman chairing the 35th GST Council meeting in New Delhi/Photo: PIB
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Above: Finance Minister Nirmala Sitharaman chairing the 35th GST Council meeting in New Delhi/Photo: PIB

The CAG Audit Report, while appreciating the introduction of the Goods and Services Tax, exposes some deficiencies that need to be fixed

By Sumit Dutt Majumdar

The Comptroller and Auditor General (CAG), in its Report for the year ending March 2018, has dealt with the implementation of the Goods and Services Tax (GST) in India in the first year of its introduction. In the “Preface” of the Report, the efforts of all the stakeholders in transiting to the GST system have been appreciated. It has also been urged that the gaps/shortcomings in the implementation of GST, as have been pointed out in the Report, should not be taken by the stakeholders as a fault-finding exercise; these are to be taken “in the spirit of constructive suggestions to realise the full potential of this major reform”.

After examining the “objectives of GST” and the “extent of achievement and the fallout”, the CAG Report has stated that the objective of unifying multiple central and state taxes has been mostly achieved. As for the “simplified tax structure”, the objective of “eliminating multiplicity of tax rates” has also been mostly achieved. But, the objective of “simplified forms and procedures” was found to be not achieved. It was observed that the key monthly returns like GSTR-2 and GSTR-3 were kept on hold, and the new simplified returns were yet to be rolled out.

It may be mentioned here that on its third year of implementation, the GST Council has notified the revised simplified returns which will be implemented from October 2019, after a pilot run of three months. On the objective of having “system verified seamless flow of Input Tax Credit (ITC)” through filing of GSTR 1, 2 and 3 by taxpayers, it was observed that this did not work with the GSTN and the IT infrastructure, and therefore, the filing of GSTR 1 & 2 was suspended, and instead a self-assessed Summary Return (GSTR 3B) was designed. Thus, in the absence of GSTR 1 & 2, the key mechanism of system-verified ITC and invoice matching was not achieved. With the delay in framing a revised return mechanism, the “Summary Return GSTR-3B”, which is more of a self-declaration, continued instead of the system-generated return based on verified invoices. This objective was therefore marked as “not achieved”. It has also been observed that the unverified ITC had led to complications in the finalisation of Annual Returns. These observations are correct.

As for providing a “single IT-based Interface for Tax Payers”, it was observed that the system was still evolving and the processing of refunds was still manual. On the objective of creating an “IT based Tax Administration”, the Report commented that it was partly achieved, since certain modules like Refund, Adjudication, Appeal and so on, were yet to be built.

While generally appreciating the implementation of GST as a “landmark achievement”, the Report pointed out that one significant area where the full potential of the GST roll-out was not achieved was that of the “simplified tax compliance regime”. It was observed that even after two years of roll-out of the GST, the system-validated ITC through “invoice matching” was not in place, and that a non-intrusive e-tax system remained elusive. It pointed out that due to the complexity of the return mechanism and the technical glitches in the GSTN, the IT infrastructure resulted in a roll-back of invoice-matching, rendering the system prone to fraud.

On the revenue front, the Report observed that the growth of indirect taxes slowed down to 5.80 percent in 2017-18 over 2016-17, while this growth rate was 21.33 percent during 2016-17. After the implementation of GST, the centre’s revenue of goods and services (excluding central excise on petroleum and tobacco) registered a decline of 10 percent in 2017-18 as compared to the revenue of subsumed taxes in 2016-17.

The CAG Report also pointed out a serious lapse with regard to “distribution of funds”.  During 2017-18, the Government of India resorted to devolution of the IGST year-end balance to the states as per the Finance Commission formula. This was in contravention of Article 270 (1) of the Constitution in terms of which the duties levied under Article 269 (A) i.e. IGST will be excluded from the Finance Commission formula. Thus the CAG correctly observed that this impacted the distribution of IGST funds to the states since it was not based on the concept of “Place of Supply” as envisaged in the IGST Act.

The Report said that as per different provisions of Article 266 of the Constitution like “the GST Compensation Act” and the accounting procedure for “Compensation Cess”, the cess was to be transferred to the “Public Account”. However, from the Finance Accounts 2017-18, it was noticed that there was a short transfer of Rs 6,466 crore of Compensation Cess to the Public Account. On this, the reply of the Ministry was still awaited.

Further, the statistical data on Transitional Credits and Refunds which were processed and pending and also the cost of collection which were called for, were not provided by the Ministry. Hence, these aspects could not be analysed and the same could not be included in this Report.

These aspects would need the Ministry’s prompt action. The CAG Report critically commented on certain IT modules of the GSTN.

On “Registration Modules”, it was observed that system validations were not aligned to the provisions of the GST Acts and Rules which resulted in certain crucial gaps in that module. The system failed to validate and debar ineligible taxpayers from availing of the Composition Levy Scheme. Mandatory fields were made optional or were accepting junk values. Tax Deduction at Source (TDS) registrations were allowed under invalid categories. There was also a lack of validation with the Central Board of Direct Taxes (CBDT) and the Ministry of Corporate Affairs (MCA) databases of key fields in Registrations like legal name, type of business and CIN, etc.

The “Payment Module” was also fraught with certain operational deficiencies. There was delay in updating the “Electronic Cash Ledger (ECL)” even after successful payment of tax by the taxpayer. Facility of payment through debit/credit cards was not made available. There were certain issues in reconciliation of the GST receipts. The Report observed that in a system with an automated interface between the IT applications of banks and the GST portal, there should have been no scope for errors such as invalid GSTIN and expiry of CPIN which had led to “non-reconciliation of GST receipts”.

On IGST Settlement, the Report pointed out that all the “IGST Settlement Ledgers” were not being generated for various reasons like non-implementation of corresponding GST modules like imports and appeals, limitations in capturing data from GSTR-3B Returns, and so on. This had a bearing on the inaccurate settlement of funds between the centre and different states.

The Report pointed out certain “system design deficiencies”. For example, the IGST algorithm was found to be defective in picking up entries from wrong reports in the IGST module. A field like turnover limit which was prone to changes was not made configurable. There was no system of issuing alarm when the threshold turnover prescribed for the Composition Levy was crossed.

While summing up the “IT Audit findings”, the Report stated that due care was not taken both in development and in testing of the system before the roll-out. The failure to map business rules correctly and the absence of key validations in the rolled out system point to inadequacies in the functioning of GSTN. The issues brought out in the “IT Audit findings” pointed towards the need for GSTN to reexamine prioritisation of development of various functionalities, strengthening the “root-cause analysis” and the testing process of the discrepancies, to ensure that critical deficiencies in application are detected and rectified.

It is true that no proper “test run” of all the modules could be undertaken before the GST roll-out, in order to meet the target date. The Report pointed out that in the absence of unhindered and full access to pan-India data, the conclusions made on the “Compliance Audit of GST” were based on limited audits. Even then, the issues brought out point to systemic deficiencies that need to be addressed by the Department. Transition Credits, Registrations and Refunds were the critical deficiencies.

Finally, it was emphasised that the “system of payment” and “settlement of tax”, including the “settlement of IGST” that was envisaged for GST was based on one hundred percent “invoice matching” and “availment of Input Tax Credit”. Invoice matching is the critical requirement that would yield the full benefits of this major tax reform.

It would protect tax revenues and would lead to pro­per settlement of IGST, and minimise the tax official-assessee interface. Besides, it will facilitate detection of tax evasion by applying analytical tools and Artificial Intelligence (AI) to the massive data that crores of invoices generate.

While there cannot be any dispute regarding these observations, it is also to be appreciated that the time given for kickstarting GST was not sufficient to install the system for one hundred percent “invoice matching”. Overall, the CAG Report on GST implementation is hugely objective, based on correct analysis of law and procedures, and it’s a laudable one.

—The author is former Chairman, Central Board of Excise & Customs, and author of four books on GST including GST Explained for Common Man

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  1. If the GSTN was unable to provide the GSTR 2 and 3 modules on time, then the government should have been lenient on levying late fees. As of today, if I am unable to file 3B, it is because of late fees. If I file my GSTR 1 but not 3B then I come on radar easily. So I remain a non filer of both returns, and that is more trouble. Again, there are 2 rates of late fee. 20 & 50 per day. To avoid action from Departments, one files his 3B at a lower late fee, which gives rise to further complications. All in all, government has to finish these 2.5 years by giving some and taking some.

  2. We have been stating this since last 15 months. The government is stuck in a loop. It is not getting desired revenue through tax, and hence has to collect horrible late fees, and then again non filing of returns due to late fees is resulting in further unwanted exercise. At this juncture, we would like to further suggest that filing of GSTR 2 for initial 2 years be started, thereby helping taxpayers who have not received input credit in their GSTR 2A. The annual return captures sales data from GSTR 1, claimed ITC from GSTR 3B and available ITC from GSTR 2A. If GSTR 2 is allowed, it shall remove defects in GSTR 1, thereby straightening out sales and purchase data. The GSTR 3B may be kept as a low reference return during assessments. This will help genuine input credit claims, whereas it will bring fake claims on the radar easily. The late fees on GSTR 3B may please be waived and returned to tax ledger. If someone very higher up in the authority is open for discussion, we would like to suggest further tightening measures.

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