GST system prone to input tax credit frauds: CAG

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Published: July 31, 2019 3:14:44 AM

The roll-out of GST has unified the multiple central and state taxes on goods and services to a great extent and made credit for input taxes available through the value chain, but hasn’t simplified the tax compliance regime while the experience so far has also been that of slowdown in tax revenue growth, the Comptroller and Auditor General (CAG) said.

The CAG also pointed out that the Centre’s revenue from taxes on goods and services subsumed in GST registered a 10% decline in 2017018 compared to the previous year.

The roll-out of GST has unified the multiple central and state taxes on goods and services to a great extent and made credit for input taxes available through the value chain, but hasn’t simplified the tax compliance regime while the experience so far has also been that of slowdown in tax revenue growth, the Comptroller and Auditor General (CAG) said. “The system of payment and settlement of tax that was envisaged for GST was based on one hundred per cent invoice-matching and availment of input tax credit (ITC), as well as settlement of I-GST on the basis of invoice-matching. Neither is possible as of now, as an invoice-matching system has not kicked-in,” the top auditor said in a report tabled in Parliament on Tuesday.

The CAG also pointed out that the Centre’s revenue from taxes on goods and services subsumed in GST registered a 10% decline in 2017018 compared to the previous year. GST came into effect from July 2017. So, the overall growth of indirect taxes collected by the Centre slowed from 21.3% in 2016017 to 5.8% in 20170-18, the auditor noted (in 2018-19, the growth was even lower at 2.9%).

In fact, even as the GST expanded the relevant tax base from just over 62 lakh to 1.23 crore, the GST collections in 2018-19 was short of the initial target (budget estimate) by Rs 1.6 lakh crore or a fifth. Apart from the aggressive target set, this was also due to the series of tax cuts since the new tax was launched and also various concessions being given to composition dealers. In a recent interview to FE, revenue secretary Ajay Bhushan Pandey said the revenue forgone on account of the tax rate reductions have been to the tune of Rs 90,000 crore.

The CAG, however, said that the complexity of return mechanism and the technical glitches of the e-tax system led to roll-back of invoice-matching, rendering the whole system prone to ITC frauds.

“The deficiencies in the GST system also point to a serious lack of coordination between the executive and the developers (of GSTN, the IT platform).”

“GSTR-3B being only a summary return, short-filing of GSTR-1 implied that the tax departments did not have complete invoice level details as filed by the suppliers, which could be used to verify details given in GSTR-3B or to arrive at turnover,” the CAG said. The report found numerous instances of deficiency in the IT infrastructure where system validations were not aligned to the provision of the GST Acts and Rules. This resulted in the system not being able to validate and debar ineligible taxpayers from availing composition scheme.

Despite expectations of improved compliance after system stabilised, returns filing showed a declining trend between April to December 2018, the CAG report said. As per monthly trend, only about 70% of eligible taxpayers have been filing GSTR-3B returns till the deadline. Moreover, GSTR-1 filing is considerably lower than this at around 60% of eligible taxpayers.

In conclusion, the CAG report said that invoice-matching is the critical requirement that would yield the full benefits of this major tax reform. It would protect the tax revenues of both the Centre and the states and would lead to proper settlement of IGST and would minimise, if not eliminate, the tax official-assessee interface, it said.

“In fact, even “assessment” in the sense understood in the manual system may no longer be necessary (returns themselves can be generated by a system that matches invoices); and cases of evasion etc., can be traced by applying analytical tools and AI to the massive data that crores of invoices generate,” the CAG said.

In conclusion, the report said that invoice-matching is the critical requirement that would yield the full benefits of this major tax reform. It would protect the tax revenues of both the Centre and the states, it would lead to proper settlement of IGST and would minimise, if not eliminate, the tax official-assessee interface, it said.

“In fact, even “assessment” in the sense understood in the manual system may no longer be necessary (returns themselves can be generated by a system that matches invoices); and cases of evasion etc., can be traced by applying analytical tools and AI to the massive data that crores of invoices generate,” the CAG report said.

Further, the CAG criticised the ad hoc manner of provisioning integrated GST between the states and Centre, as this was in contravention of the constitutional provisions. “This has also impacted the distribution of funds to the states on a completely different basis instead of ‘place of supply’ concept as envisaged in the IGST Act,” the auditor added.

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