The new returns system advocates the concept of regular invoice upload and is proposed to be fully automated involving the reconciliation of invoices before proceeding with ITC claims.

Rajat Mohan

It has been over two years since the Goods and Services Tax (GST) was rolled out across the county, subsuming more than 15 indirect taxes and a host of cesses. Replacing multiple taxes and cesses of state and central governments into a single tax has been a major relief to trade and industry. The expectations from GST were varied. Businesses, whether large or small expected fewer taxes, less paperwork, transparent rules, and easy bookkeeping. Consumers expected to better products at a lower cost, and the taxpayers were looking for more convenient ways of compliance. The IT-driven tax filing system of GST has made it difficult for intermediaries in the value-added chain to evade taxes.

As we begin planning to face another year, let’s explore how GST has really impacted India in the short-term and what the projected impact for the long run would be.

There is no doubt that the process of E-invoicing will help the global economy by curbing tax evasion as it enables pre-populating of GST returns and e-way bills with the e-invoicing details. In addition, it would standardize the invoice format ensuring the interoperability of the data, practically eliminating fake invoices, providing a complete trail of B2B transactions and enabling system-level matching of ITC and output tax. Tax technologists are cautious and worried about its implementation as this feature would require innovating and updating the millions of existing business accounting software. E-invoicing would also add another layer of compliance for the taxpayers.

A new rule has been added in GST rules which restricts a registered person to avail ITC on invoices or debit notes which are not reflected in GSTR-2A to the extent of 20% of the eligible ITC reflected in GSTR-2A. By insertion of this new tenet, the recipient taxpayer is being reprimanded for any trivial error by the supplier in filing tax returns deferring the availability of an otherwise eligible tax credit. This results in the working capital woes for a taxpayer fueling the cost of capital for a business. This restriction on availing ITC by the purchaser is arbitrary and unjustified as it will certainly impact the working capital of taxpayers as they have to pay more taxes when suppliers file belated returns in Form GSTR-1.

Other challenges the industry has been facing include an increased compliance burden. To ensure smooth compliance for taxpayers as well as to ensure better transparency in the system, the new GST returns filing system is planned to be launched in April 2020. The new returns system advocates the concept of regular invoice upload and is proposed to be fully automated involving the reconciliation of invoices before proceeding with ITC claims. It also facilitates the benefit of the filing of nil return through SMS. The success of the proposed system can only be commented upon once the system in place, till then we have to take all the bold statements of GSTN with a pinch of salt.

GST Network has developed a massive system of identifying potential areas of tax evasion by generating “Red flag alerts”. Once the GST system generates “red flag alerts”, the information will be shared with the taxmen for appropriate actions. The system generated “red flags” include default in payment of tax, non-filing of GSTR-3B, mismatch in the input tax credit claimed by businesses with the returns filed by the supplier, generating e-way bill without the filing of returns, etc. Going forward these reports would align taxpayers to cautiously file tax returns without committing errors in the filing.

Exclusion of certain items from GST creates distortions such as cascading of tax and reversal of input tax credit. Since the tax on diesel and petrol gives substantial revenue to states and Centre, it is obvious that bringing them into the GST will be a difficult decision. Similarly, electricity and alcohol are items on which only states have the power to impose an indirect tax. Rigorous political attempts should be made to bring all excluded items into GST one by one in the next five years. This act may be undertaken one at a time in a particular sequence of petroleum products, electricity, real estate, and alcohol.

On priority, it is up to the government to address the capacity building amongst the lesser-endowed participants, such as the small-scale manufacturers and traders. Ways have to be found for lowering the overall compliance cost, and necessary changes may have to be made for the good of the masses. Shifting the Indian economy on to a completely digital platform together with reskilling and upskilling the workforce would be a good start. We have to wait for the next year to see what does GST has in store for the taxpayers.

Rajat Mohan is Senior Partner at AMRG & Associates. Views expressed are the author’s personal.