Many have argued that GST is losing its sheen and needs a complete overhaul. (Representational Image)
Even as the 31-month-old GST evolves, the debate on its success rages on. Many have argued that GST is losing its sheen and needs a complete overhaul while others contend that the new tax system is on course and the trials and tribulations were not unexpected. The faltering collection in September and October, 2019, has added fuel to the fire.
An analysis of collections will reveal that the average monthly GST collection for the period August 2017 to January 2020 stands at Rs 97,188 crore which is an impressive 39 per cent increase over the average monthly collection of subsumed taxes in the base year 2015-16, at around Rs 70,000 crore. This is an average growth rate of 9.7 per cent over the almost 4-year period post 2015-16 and a compounded growth rate of 8.55 per cent. This compounded growth rate is not insignificant even though it is just about 61 per cent of the very ambitious 14 per cent rate of growth promised to the states before GST rollout. To put this in perspective, the average growth rate of collection in 18 non-special category states (accounting for bulk of the revenue) during the 3-year period immediately preceding GST stood at around 8.9 per cent, according to a study by M Govind Rao. Thus, looked at from the view point of revenue yield alone, if the perception about the effectiveness of GST has not been very encouraging, it is only in the context of the very ambitious 14 per cent compounded annual growth rate promised to the states.
The revenue performance of GST during the current fiscal year is not out of sync with the overall economic situation in the country. Accordingly, during the 10-month period ending January 2020, the growth rate in tax yield was 4.69 per cent. The relatively tepid growth was primarily on due to a negative growth of 4.03 per cent in September-October 2019. After the dip in September-October 2019, GST collections rebounded and this is a reminder that one need not write GST off in a hurry.
There are other reasons for tepid growth in GST collections. Complacency in the states on account of assured 14 per cent growth cannot be ruled out. States were jolted with the delay in compensation for August-September 2019 and resorted to vigorous monitoring of compliance and action against toxic and unverified credits, circular trading and tax evasion which had resulted in unmatched credit claims of around Rs 50,000 crore.
The GST Council deliberated on the recent trends in revenue collection and was cognisant of the need for corrective measures. Two options were suggested. One was the “big bang” approach, requiring an overhaul of the legal framework, processes and systems and re-writing GST almost de novo. Alternatively, a “steady state” approach was propounded which involved incremental reforms, solving problems as they arise, plugging loopholes, improving the compliance environment through increased monitoring with better tools. The Council chose the second approach and the signs are already showing.
Editorial: Balance the needs
A host of steps are being taken or have been contemplated.
The GSTN has developed red flag reports based on GSTR-1, auto-generated GSTR-2A, GSTR-3B and the national e-way bill system. These reports identify non-filers so that action can be taken against active taxpayers who defaulted in filing returns. Till November 2019, around 6 lakh dealers had defaulted in furnishing one or more returns from July 2017 involving estimated tax liabilities of around Rs 25,000 crore. An SOP has been developed for proceeding against such return defaulters and this has helped increase the percentage of filing which has contributed to revenue.
These reports also highlight differences between turnovers reported in GSTR-1 and GSTR-3B, the credit available as per auto-generated GSTR-2A and actual credit availed in GSTR-3B and mismatch between GSTR-1/GSTR-3B and the value of e-way bills in respect of taxpayers. It was found that during 2018-19 around 39,000 dealers had admitted a tax liability in GSTR-1 which was approximately Rs 22,000 crore higher than the corresponding figure in GSTR-3B. Similarly, the difference in credit availed in GSTR-3B by around 2 lakh dealers and the auto-populated GSTR-2A stood at around Rs 70,000 crore. These differences between turnovers and the credits are being investigated.
To further the ease of doing business, it was decided to grant registration without physical verification and a system of deemed registration was put in place. Spot verification has unearthed non-existent dealers and led to the cancellation of around 1 million entities. It has now been decided to mandate Aadhaar authentication for taking new registration and thereafter the existing registered taxpayer population would have to undergo Aadhaar authentication in a phased manner. An attempt is being made to classify applicants for registration so as to limit deemed registration only to certain categories which do not pass on credit in the system; others may have to endure with some level of verification or restriction on the quantum of credit.
Analysis of GSTR-2A and GSTR-3B revealed that the credits availed in the returns exceeded the actual credits availed by about 40 per cent in 2017-18 which came down to around 12-13 per cent in 2018-19. It was decided to limit the credit available in the returns at 110 per cent of the auto-generated value in GSTR-2A. It was also decided to block utilisation of ineligible or fraudulent credit originating from or lying with non-existent dealers. A system of auto-blocking of e-way bills for two-month return defaulters has been put in place. Further, RFID based e-way bills through integration with FASTag is on the anvil to facilitate hassle-free movement for compliers and effective verification of defaulters.
Advanced analytic tools are being used to unravel complex networks of firms created just for generating credit and these analyses are being strengthened through machine learning and AI. An all-India offence/enforcement data base is being built.
In order to identify dealers posing a “hazard” to revenue and do a 360-degree profile of risky taxpayers, a system of regular data exchange with banks, CBDT, ED, RoC and other agencies is being put in place; fraudsters will find it almost impossible to game the system. The new return system set to roll from April 1 is expected to curb incidences of unmatched turnovers and utilisation of un-validated credits while simplifying the compliance environment with the help of offline utilities and matching tools made available to taxpayers.
In order to validate and improve the quality and fidelity of invoice reporting and return filing, a system of e-invoicing is proposed to be implemented in a phased manner beginning April 1. This will begin with taxpayers with turnovers exceeding Rs 500 crore and will auto-populate e-way bill generation and filing of Anx-1 in the new return system apart from validating credit flow from taxpayers.
These measures will effect qualitative improvement to the compliance eco-system which will not only lead to improvement in collection but will also make life easier for taxpayers and tax authorities alike.
This article first appeared in the print edition on February 15, 2020 under the title "Fine-tuning GST". The writer is Deputy Chief Minister, Bihar.