The Goods and Services Tax (GST) is an indirect tax (or consumption tax) on the supply of goods and services. It is a comprehensive, multi-stage, destination-based tax–comprehensive as it has subsumed almost all indirect taxes, multi-staged as it is imposed at every step in the production process (but is refunded to all parties at the various stages of production except the final consumer) and destination-based as it is collected from point of consumption and not of origin like previous taxes.
The GST regime, which took effect on July 1, 2017, is a welcome change for the economy in the long-term. In the short-term, however, it has created huge challenges such as confusion in the GST laws and problems in the portal. The first filing of annual returns for July 2017 to March 2018 for audit and assessment is due on June 30, 2019.
There is a need to not penalise genuine players and use the first year audit as a learning opportunity for all. The government should consider amnesty for genuine players with only procedural defaults.
With just 10 months between the enactment and the effective date, there was little time for businesses to understand nuances. There is a GST Council, consisting of States’ and Central representatives to decide the GST rates through consensus –a huge ask in our federal structure. Industries faced challenges ranging from understanding concepts, managing complex documentation, unclear treatment of several common transactions to high rates of certain goods and services.
A major area of concern is the functioning of the compliance portal. Initially, there were dozens of detailed forms to be filled every month. There were glitches in the software and its processing capacity, which resulted in frequent deferment of due dates of returns in the initial months.
The GST regime has three taxes – IGST, CGST and State GST. These have major implications for the service industry requiring them to set up multiple GST registrations in each State. There were five GST slabs with confusing exemptions. The input credit was expanded from direct inputs to all inputs.
The GST Council reduced the GST rate for some items like tractor parts from 28% to 18% and fertilizer from 12% to 5%. The initial cut was for enterprises with a turnover of Rs 20 lakh per year, which on being too low was revised to Rs 40 lakh per year. Many small enterprises didn’t have adequate computerised systems to match the strict data needs of the GST regime. Moreover, the procedure was so complex that in just the first 10 months, there were 357 amendments and as of May 1, 2019, this has reached 627. An unprecedented state of flux has prevailed.
Genuine Vs Frauds
Audit in indirect taxes plays the same role as assessment in Income Tax. Deficiencies are pointed out in an audit report and assessees are given an opportunity to comply, failing which a chargesheet is filed.
So for the assessees, it is an opportunity to get clarity on government policies and correct their internal systems for compliance; for the GST department, it’s a crucial procedure to verify the self- assessment done by the assessee, to identify the gaps in understanding the rules between the assessee and the department, to identify wilful defaulters to ensure their compliance and provide an opportunity to the assessees to correct their mistakes.
In any compliance audit, we come across three types of players:
• Mostly large companies that try to be 100%compliant because they account for everything in white money and want to be on the right side of law. They rarely default except when there is a genuine difference of interpretation.
• Many small and medium size companies that try to be 100% legal but are deficient on complying with procedures due to limited understanding. When procedures are cumbersome or changing continuously, they are lost and need guidance. These players account all their GST transactions in their books on time but miss out on their interpretations of input credit or supporting documents required to claim input credit. They have no intention to commit fraud. They correct their accounting and GST systems as soon as they realise their omissions from audit reports.
• The third are wilful defaulters. They do fraud transactions, create fictitious entries to align GST and Income Tax records to exploit the tax system. They are habitual defaulters and are on tax department radar. A review of past audit reports will easily identify them. The leadership of these companies attempt to cut deals with the department.
Dealing with Defaulters
The first two types are genuine long-term players. They would have accounted for the GST transaction in their accounting books and the input credit transactions would have been genuine.
Often the tax department treats the second and third type of players similarly, mostly in the following two ways. First make a deal — force the defaulter to admit default in part and let go of the balance default. The second approach is to threaten to treat them as habitual wilful defaulters with severe penalties.
The department heads, who come with IRS pedigree, many a time refuse to differentiate between wilful and non-wilful defaulters. It is a tragedy that the department supports wilful defaulters subject to making deals but does not help genuine players. So, the law abiding assessees pay the price while others get away. This must be corrected.
All the three types of players also delay their GST remittances due to the cash crunch. GST has to be paid immediately whereas the payment may be received over a period of 4-6months.
• Treat defaults as genuine (unless proven otherwise) and hence defaulters as genuine
• Give opportunity to correct the mistakes without penalty
• Delayed payments and under payments are due to the state of flux. Waive interest on delayed payments or reduce to 6 % on a par with I-Trefund interest paid by government
• Provide 12-month instalment payment for delayed interest payment without penalties
• Based on the findings across multiple audits, identify common mistakes, issue circulars clarifying errors, initiate training for the assessee
(T Muralidharanis Chair and Sudhir VS is council member, FICCI Telangana)