The government’s attempts to ensure the removal of pain points for businesses over the six months since the implementation of the goods and services tax (GST) was simultaneously matched by efforts to keep the system foolproof from the point of view of revenue leakages. Ingenious traders and businesses, though, have not been daunted, with early revenue numbers pointing to the clear possibility that a number of them are skipping the entire value chain of scrutiny by the tax authorities. The high incidence of tax evasion has a bearing on the declining revenue collections, especially under the composition scheme, which was designed for small and medium businesses under the new indirect tax regime.
Around 15 lakh small firms have registered under the composition scheme so far (11 lakh till September), out of which about six lakh filed their returns for July-September till December 24 and paid a total tax of around Rs 250 crore. Assuming an average two per cent tax incidence on their turnover, the total tax amount translates into an average turnover of Rs 2 lakh for these firms during July-September, or about Rs 8 lakh for the full year if the data were to be annualised, given that the composition dealers are supposed to file quarterly returns under GST, according to senior government officials involved in the exercise.
The average annual turnover number of Rs 8 lakh is less than half of the overall annual turnover exemption limit of Rs 20 lakh for registering under GST, implying high level of understatement of revenues by businesses.
The tax incidence for composition dealers for July-September was one per cent for traders, two per cent for manufacturers and five per cent for restaurants, which was revised by the GST Council in its November meeting. In order to reduce the compliance burden for businesses, the Council had decided to increase the annual turnover threshold for the composition scheme to Rs 1.5 crore from the earlier revised limit of Rs 1 crore. The tax rate for manufacturers under the composition scheme was cut to one per cent from the earlier rate of two per cent, bringing it on par with the tax rate for traders, while the rate for restaurants was kept unchanged at five per cent.
The low rate of revenue collections under the composition scheme in the first quarter of the GST roll-out amid the already falling revenues led the tax authorities of both the Centre and states converging into a huddle in December to discuss ways to plug the loopholes for tax evasion. Behind the curtains, the government decided to speed up work for the technological framework required for an early introduction of the electronic way bill or e-way bill system, which had been earlier deferred till April 1.
The e-way bill system, which is scheduled to start from January 16 on a voluntary basis, is being viewed by the government as an effective method to check tax evasion and improve compliance. “Prior to the implementation of GST, Karnataka, like many other states had stationary checkposts. These checkposts have now been abolished in Karnataka. However, random checking of conveyances through the mobile squads continues under the GST system. After the introduction of the e-way bill system, random checking of vehicles to implement the e-way bill system is underway. At this juncture, the effort is to educate and handhold the dealers to adopt the new system. Over time, implementation of the e-way bill system would lead to better compliance and would check evasion,” Karnataka agriculture minister Krishna Byre Gowda, who is also a representative in the GST Council, told The Indian Express.
The government now is also learnt to have firmed up its view to bring back other measures to boost compliance such as reverse charge mechanism and invoice matching. “The government is waiting for the roll-out of the e-way bill system first, and subsequently will also consider bringing back the earlier deferred measures of reverse charge mechanism and invoice matching,” a person close to the development said.
Without waiting to revoke suspension of GSTR-2 and GSTR-3 returns, the government is considering developing operationalising a back-end structure for invoice matching, wherein the tax authorities will match details in GSTR-1 returns with the already-available information in their system through matching details of sales and purchases at their end, the person cited above said.
The other measure of reverse charge mechanism (RCM), wherein the liability to pay tax is on the recipient of goods or services instead of the supplier of such goods or services in respect of the notified categories of supply, will ensure restoring the supply chain and also bring many unregistered dealers into the ambit of the GST regime, an industry source said. “Under RCM, it was believed that dealing with unregistered smaller businesses would be increase the compliance burden for big businesses and thus, effectively lead to sidelining of the small businesses. The view working for its reintroduction is that a small business would not want to lose out and instead register under the GST regime. This would serve two purposes — easier business compliance for big businesses and higher tax base for the government,” an industry source said.
The industry, however, has raised concerns about the e-way bill system being a possible route for re-emergence of supply chain bottlenecks and discretionary power to tax officials. “There are both positives and negatives of e-way bill system. While some level of tax evasion will be checked, e-way bill may not be able to check it completely. On the negative side, it adds a layer of compliances and is against the government’s stated objective of ease of doing business,” said Abhishek Jain, tax partner, EY India.
Trade and industry is also concerned about whether the businesses will have enough time to adjust with the new technological system of e-way bill since there is no clarity so far whether the registered taxpayers will have to use GST Network (GSTN) portal or the NIC portal developed separately for e-way bill. “Greater clarity is required by industry on the usage of e-way bill since it would effectively get only 15 days before the mandatory rollout of the system from February 1. The government should first float the IT system for e-way bill and give adequate time for the industry to prepare lest it leads to supply chain bottlenecks from February 1,” Jain said.
With monthly revenues slipping below the targeted level of Rs 91,000 crore, finance secretary Hasmukh Adhia on December 9 had called a meeting of officials from states and Union territories to discuss ways to boost tax revenues under GST. Following this meeting, the GST Council had met on December 16 to approve an early implementation of e-way bill system and approved February 1, 2018 as the date for mandatory roll-out of the e-way bill system for inter-state movement of goods across the country, as against the earlier approved date of April 1. For both inter-state and intra-state movement of goods under the e-way bill system, the Council had approved the deadline of June 1, with states having the provision to choose their own deadlines for implementation of e-way bill for intra-state movement of goods before June 1.
Under the e-way bill system, which offers the technological framework to track intra-state as well as inter-state movement of goods of value exceeding Rs 50,000 for sales beyond 10 km, tax officials will have powers to check the e-way bill at any point during the transit to check tax evasion. According to the notified e-way bill rules, the permits issued would be valid for one day for movement of goods for 100 km and in same proportion for following days. The e-way bill rules specify that every registered supplier will require a prior online registration on GSTN portal for movement of goods valuing more than Rs 50,000.
GST collections have been declining since October, with the mop-up for November slipping to Rs 80,808 crore (as on December 25), the lowest since the July 1 implementation of the indirect tax regime. The impact of GST rate cut on over 200 items that became effective from November 15 was reflected in the month’s collection, which were about 14 per cent lower than the collection of Rs 94,063 crore recorded for July (as on August 31) and about 11 per cent lower than the projected monthly target of Rs 91,000 crore.