This story was narrated by a friend. He was frustrated by the ‘every day’ call he was getting from a government team to enquire about monthly GST payments and filing of GST returns. First, it used to be for the overdue return. Then they started following up on his ‘not yet due’ return, ie, the current month’s return. While on the one side, he was pleasantly surprised that the revenue team has become pro-active, on the other, he realised that he was in trouble because he was behind in his GST payments by two months and so was unable to file GST returns. Of course, as provided in the GST Act, he must pay 18% interest for late filing.
Now comes the interesting part. Why was he not current?
• The Service Tax Act, the precursor to GST, was amended in July 2011 whereby tax will be due based on invoicing. Earlier, it was due on collection. So, he was now supposed to fund GST, which is a huge burden for SMEs like his because customers don’t pay on time.
• The bigger cause is the government. His I-T refund had grown to over Rs 2 crore and it was overdue for 3 years. He was unable to get through to the Central I-T Processing Unit at Bengaluru and the contact centre was giving the same mechanical reply ‘refund is in process’ for the last 12 months
The pity is that the government has no penalty for delaying tax refund because they pay interest at a nominal 6% (while GST and even the I-T department charges 18% when I delay). This is money-making by the government – first don’t pay on time and force your tax payers to delay your payment, and you make money due to interest differential.
Why should one suffer due to government inaction? The icing on the cake is – he gets threatening calls from tax authorities that if he does not pay, they will freeze his bank accounts!
There is a theory prevalent among senior government officers that most citizens will break the law if they can get away with it and that they are the only party standing between the crooks and public interest. This version is not entirely true. There are many citizens who will follow the rules partly because they are scared of the consequences and partly because of their parental upbringing. Clearly this number is dwindling. Why? Because these citizens see law-breakers are getting away due to connections and bribe, but they are penalised. We must reverse this trend immediately.
In the pre-GST era, State governments used to collect VAT and excise on which they had greater control due to past experience. Earlier, service tax was a Central revenue collected by the Centre and shared with the State government. Suddenly the GST era changed all that.
Service tax assessments have become very complicated due to State GST and Central GST. So the State government officials are unable to forecast the collections accurately and have decided to chase those they know are large tax payers, ie, compliant tax payers. So everyone is chasing the same set of people. Segregation and grading may help in chasing the people who are the real defaulters. All this call for corrective action.
Segregate complaint citizens: The first step is to grade the tax payers or contributors to any government revenue based on their compliance track record and treat them differently based on their rating. Today, even honest government officials refuse to help the compliant because they are scared that they may be victimised later.
Compliance Rating must: We need compliance rating for I-T, GST, property tax and all revenue departments. Even banks and financial institutions must grade their customers on compliance record. Both Central and State governments must do it. But is it possible?
The Organization for Economic Cooperation and Development (OECD) in 2004 categorised tax payer attitudes into disengaged, resistors, triers and supporters and devised a compliance strategy for each. (see infographics)
The same document suggests the following treatment strategies for tax administrations:
i. Compliance programmes need to provide a calibrated response to compliance behaviour — making it easy for those who want to comply and applying credible enforcement to those who don’t
ii. Acting at all times with integrity and in a manner perceived to be fair and reasonable will encourage voluntary compliance
iii. Treatment needs to address the underlying drivers of compliance behaviour
iv. Enhanced capacity to influence taxpayer compliance behaviour often comes through strategic alliances and partnerships with other agencies, industry bodies and tax advisers
Because of two reasons. This is the Budget time where policy announcements are made. Second, this is the second term of Narendra Modi, who wants to change the system fundamentally and has a clear mandate to do it.
Section 149 of the Central GST Act 2017 (No 12) has a special provision for rating tax compliance. This section, which is yet to be implemented, states:
1. Every registered person may be assigned a GST compliance rating score by the government based on his record of compliance with this Act.
2. Rating score may be determined on the basis of such parameters as may be prescribed
3. Rating score may be updated at periodic intervals and intimated to the registered person and also placed in the public domain in such manner as may be prescribed
Making it Better
• Reduce delayed payment interest rate in GST and I-T to 12% per annum and increase tax refund interest rates to 12%. First rule of tax compliance is to have the same set of rules for both the tax payer and the government
• Delink filing of GST returns from paying GST taxes. Taxpayers, unable to pay their dues, can pay later with applicable interest. But timely filing will mean acknowledgement of dues and help in the tracking of GST transactions
• Set a timeline for implementing Section 149 of the Central GST Act
• Issue rules relating to the parameters of the rating in the Budget along with the benefits of high rating. The benefits should include incentives and reliefs for the compliant
• As referred in the OECD paper, the approach of tax authorities should be to ‘make it easy’ and ‘assist to comply’ for the top two categories of persons
• Implement compliance rating in I-T too
• Customers with high compliance rating must be given a long rope when they have genuine difficulties and the senior officials must be empowered to make exceptions for them. Government officials should be authorised by statute to differentiate taxpayers, based on the rating. This is critical to grant relief without fear of victimisation
• Enterprises with high compliance scores should be allowed to use this information to their advantage while seeking loans and bidding for contracts
• Citizens should be encouraged to carry their rating on their sleeves. Imagine that you are the most compliant citizen and you are invited to the Republic Day parade alongside the foreign dignitaries!
(The author is Member, National Board of MSME, Ministry of MSME, and co-chair, Ficci Telangana State Council)