Goods and Services Tax (GST) collections, in aggregate, are still way below the targets set by the authorities, but their efforts to improve compliance, check excessive use of input tax credits and frustrate frauds like fake invoicing are paying off, albeit gradually.
Since the Centre cut its own budget estimate for GST by over 8% to Rs 6.1 lakh crore, it would likely meet the revised estimate, even with the current pace of collections; but in order to be able to meet the gross collections target, which includes fully compensating the states for any revenue shortfall from the assured annual-growth level of 14%, the March mop-up requires to be an impossibly high Rs 1.4 lakh crore.
The compliance rate of monthly returns filing by the registered taxpayers rose to over 80% in February (for January transactions), from just 59% in May 2019. Since the filing of the GSTR 3B, the monthly return, involves discharge of the self-assessed tax liability, the increase in filing of these returns has pushed up collections, especially in the four months to February (see chart).
The authorities have also blocked ITC claimed by thousands of businesses to the extent these claims are not corroborated by invoices uploaded by their suppliers, multiple tax practitioners told FE. As the credit restrictions came into effect from January 1, the mop-up is getting a boost in Q4.
Experts said one reason for the improvement in compliance is the restrictions imposed on generation of e-way bills by those not filing regular returns. This has aided collections from domestic transactions even as GST collections from imports have taken a hit from deep contractions in inward shipments since June. E-way bill generation from a centralised portal is mandatory for a GST taxpayers for movement of cargo worth over Rs 50,000.
Apart from e-way bill restrictions, better compliance can also be attributed to stricter enforcement by field offices, data analytics reports made available by GST Network, real-time data-sharing amongst various government authorities including income tax department and transport authorities and powers given to field officers to deny ITC on grounds of evasion/fake invoicing.
The indirect tax department has also developed a risk-based index to identify entities likely to indulge in generating ‘fake invoices’ to evade tax and is strengthening the legal and administrative framework to curb the menace. These steps could potentially lead to additional GST collections of Rs 50,000 crore a year, according to the department’s internal estimate.
Fake invoices usually don’t have any corresponding supply of goods/services, nor do they involve payment of GST. These are used by the entities concerned to claim undeserved input tax credit (ITC) and use them to meet the GST liability on their outward supplies.
It’s a possibility the higher revenues were generated from better compliance. However, lower imports have still dented overall collections,” Rajat Mohan, senior partner at AMRG & Associates, said.
GST collections in February from domestic transactions alone grew by 12% year-on-year but it was dragged down by a 2% due to decline in the tax collected on imports in this period. Collections in February was Rs 1.05 lakh crore, the fourth consecutive month when the mop-up was above the Rs 1-lakh-crore mark.
However, a government official said that growth in collections could be traced to restrictions imposed by the government on using ITC to discharge tax liability in case of mismatches of credit claims and invoices. He added that given that most large taxpayers file returns regularly and the bulk of revenue comes from them, an over 80% compliance level might not produce big incremental gains in revenue. The latest compliance increases are largely due to smaller taxpayers who might not be contributing much in terms of revenue.
In October, the government inserted a clause in GST rule saying that a taxpayer filing GSTR-3B can claim provisional input tax credit only to the extent of 10% of the eligible credit available in GSTR-2A. The eligible credit is only against those invoices which show up in a taxpayer’s GSTR-2A, which is possible only if the said assessee’s suppliers file and upload all relevant sale bills in their GSTR-1 (which contains details on outward supplies).
This move was based on an analysis by the GST department which showed that as much as 39% or Rs 2.5 lakh crore of ITC claimed by taxpayers in FY18 remained unmatched with the invoices uploaded by their suppliers. Though the gap had come down to 13% (Rs 1.7 lakh crore) in FY19, it was still very large and unacceptable to the department.
If ITC claimed by a taxpayer in GSTR-3B for a given month is, say, Rs 100 and the invoices uploaded by the suppliers are only worth Rs 80, then ITC of Rs 20 does not show up in GSTR-2A in the form of corroborating invoices. So the total credit available to the taxpayer in the case will be Rs 88 (i.e. Rs 80 plus 10% of Rs 80).