... the GST rate structure must be rationalised and moved towards a two-rate structure, in addition to the tightening of the GST registration process
No wonder then that, in the meeting of the Law Committee of the GST Council held recently, a decision was taken to initiate systemic tightening of the GST registration process.
By Rahul Renavikar
It has been more than 40 months now that the GST has been implemented in India. As has happened with tax reforms in most large economies, India too witnessed turbulence in the initial years of its implementation. Added to that turbulence was the Centre and states being at loggerheads on the GST compensation issue and delays in releasing the funds to the state governments. After a lot of persuasion, the states finally agreed to the Centre’s proposal, and without referring the matter to any of the judicial courts’, accepted either of the two options tabled by the latter. Kudos to them!
Of late, there has been a plethora of cases unearthed by the central and state GST enforcement authorities, involving fraud relating to fake bills and claiming of input tax credits. Within a matter of days, around 50 persons have been arrested and around 650 cases have been booked. While the amounts involved in these unearthed fraud cases aggregate to crores of rupees, it remains to be seen as to how much of it will ultimately get recovered from the fraudsters. It is commendable that the government at both the levels—Centre and the states—has started to truly enforce the GST law and book criminals involved in such illegal activities. Better late than never!
The genesis of the GST fraud lies in not only the fraudulent intentions of the scamsters but also in the very structure of the value-added tax (VAT). There are two prominent methods of VAT mechanism, most popular being the credit-invoice method. Under this method, all sales by businesses are taxable, but sellers pass invoices on to the VAT-registered business taxpayers, who purchase goods and/or services from the seller. These purchasers, in turn, claim a credit for the taxes paid (input tax credit), but then pay VAT on the full value of their sales. The result is that there are no net taxes on the sales done between the registered VAT businesses, while the full value of the final sale to the end-consumer bears the tax. Indian GST law follows the credit-invoice method. The other method of VAT, which is very rarely used, is the subtraction-method—sometimes referred to as a business transfer tax. In this method, the VAT-registered businesses pays tax on the difference between the value of their sales and the value of their purchases from other businesses. As with the credit-invoice VAT, the sum of all the amounts subject to tax, without exemptions, is equal to the value of final sales. It is not that VAT/GST frauds don’t happen in other parts of the world, but this scale and size is perhaps seen only in India. Given the high rates of GST, the arbitrage to evade GST and claim false credits is a huge incentive for the fraudsters. The countries with a very low VAT rate do not seem to have this problem on a large scale. Adding to the problem is the sheer number of GST registrations in India. As on June 30, around 123.11 lakh businesses were registered for GST purposes, out of which, only 53.29 lakh were registered in the erstwhile indirect tax regime (prior to July 2017). This means that there is a whopping 131% increase in the tax base over a period of three years! Do the tax collections reflect such buoyancy? The answer is NO.
No wonder then that, in the meeting of the Law Committee of the GST Council held recently, a decision was taken to initiate systemic tightening of the GST registration process. The Law Committee has suggested measures which will be taken on precise identification of potentially riskier taxpayers based on very well defined parameters run on the automated environment. It is hoped that this would impact the ease of doing business for genuine taxpayers.
Thus, stricter enforcement of the GST law is in the offing which the honest taxpayers should not be really worried about. While the GST Council will certainly unleash the steps taken for curbing the fake invoices frauds, it is about time to further rationalise the GST rate structure and move towards a two-rate structure, which in the long run will not only simplify the GST system but also supplement the government’s efforts to rein in the frauds. Increasing the tax base by including oil&gas, electricity and other such sectors kept outside the ambit of the GST into the GST net and further pruning of GST exemptions will ensure that the GST revenues are stable and there is enough fiscal room for making the GST structure simpler and wider.
The author is MD, Acuris Advisors Pvt Ltd. Views are personal