Written by Abraham Kuruvilla
In what is a significant move towards plugging evasion under the Goods and Services Tax (GST) regime, the Central Board of Direct Taxes (CBDT) is entering into a Memorandum of Understanding (MoU) with the Information Technology (IT) backbone of the GST administration, namely the Goods and Service Tax Network (GSTN), to share taxpayer information. To facilitate this, the CBDT recently issued an order appointing the Principal Director General of Income Tax (Systems) to share taxpayer information with nodal officers from the GSTN. The CBDT and GSTN are collaborating to share information with each other with an aim to validate the income being reported by taxpayers and to also identify leakages if any. This initiative would provide additional support for keeping an eye on under-reporting or non-reporting of income and to help curtail tax evasion.
In GST, the information consolidation of income, reported inappropriate GST returns filed (through the GSTN) for a corresponding tax period, is the first step towards corroboration of taxpayers’ information and reconciliation of income mismatches by GST authorities (between supplies reported by sellers/vendors vis-à-vis buyers). This has largely been successful given the inbuilt system of cross-referencing and matching concept and the results have been quite impressive. While there are many genuine situations of mismatches (triggered by systemic issues, bona fide clerical errors, possible ambiguities in law or return formats, etc.), GST authorities have also detected a staggering number of cases of fraud (primarily in the context of input tax credit availed and utilisation) with mind-boggling ticket sizes.
The next logical step is for the government to identify and resolve gaps in the income reported by taxpayers under separate (but relevant) tax legislation. The obvious aspects for this would be income reporting under Indian Income tax and GST laws. Of course, the fundamental levy of tax under each legislation/regime is different following separate economic rationales, but arguably the starting point for both would be the same or similar. The PAN-based data collection and accumulation makes it that much easier to map and validate reported incomes and to identify/scrutinise gaps (if any in separately reported incomes). A common example may be a business that issues false tax invoices to another business(es) that may or may not have any real business operations, for the purpose of passing on the input tax credit. In contrast, it is likely that the same business would be reporting a negligible or nil income for Income tax purposes.
The MoU sets out the nature of data exchanges, suggests ways in which confidentiality will be maintained and also maintains the mechanisms for safe preservation of data. Under this collaboration, upon request from GSTN, the designated Income-tax authority would share data relating to income, the status of Income tax return (ITR), etc. These key financial indicators would provide valuable intelligence and guidance to the genuineness of input tax credit availment and utilisation, as well as output liability disclosures.
The MoU for exchange of information between the CBDT and GSTN is aligned with the government’s larger vision to fight tax evasion. But it is critical that stakeholders do not lose sight of the fact that not all aspects considered while reporting income under separate legislations, would be the same – this could be on account of varying principles/rules of income recognition or eligible exemptions, etc. Taxpayers must exercise diligence and determine certainty and confidence while disclosing incomes and input tax credit availment/utilisation and perhaps for the first time, businesses may need to invest time and money in a synchronised reconciliation of books of accounts for both Income tax and GST purposes.
Adopting a wide angle lens and cross verifying/identifying gaps, ensuring sufficient and relevant back-up information and explanations will need to be built into the tax process by default to avoid problems. This could, however, add to the burden of taxpayers, already saddled with the burden of reconciling input tax credit claimed on self-basis with corresponding tax declared by vendors. The new mechanism once initiated, will require maturity and depth from GST authorities to be receptive to taxpayers with genuine issues and concerns, and to discern those that require further investigation and possible penal consequences.
But as in all things, it is about putting the best foot forward and this appears to be one such attempt. Since the proof of the pudding lies in its taste, time will tell how this narrative shapes up.
Abraham Kuruvilla is Senior Director and Kalyan Kumar is Director, Deloitte Haskins and Sells LLP