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Will enforcement and easier compliance help Modi 2.0 improve GST revenue?

“We all know what to do, but we don’t know how to get re-elected once we have done it,” Jean Claude Juncker, former prime minister of Luxembourg and then president of Eurogroup said a decade ago, suggesting in-principle, that structural economic reforms spell political doom for the ruling party in modern democracies.

This subtle warning, however, did not apply to India. The Indian electorate voted the Narendra Modi-led Bharatiya Janata Party back to power, even after going through shocks like demonetisation and structural changes like goods and services tax (GST). About the latter, the government said the new tax would take time to settle down, and taxpayers would become compliant gradually with time.

Now, GST will complete two years on July 1, 2019. The policy to date under former finance minister Arun Jaitley and its outcome that we saw in the two years provide evidence, and point to the direction GST should take from here on, under the new finance minister, Nirmala Sitharaman.

While the former period was characterised by more government support and ease in compliance at the cost of revenue, the Centre has little option other than to ensure GST collections grow fast enough to achieve revenue targets, avoid fiscal spillage and deliver ‘vikas’.

Ensuring robust real GDP growth, using analytics on data generated in GST Network (GSTN) to the fullest to catch fake invoicing and under-reporting frauds, evolving a robust anti-evasion framework, making the e-way bill system free of loopholes and ensuring transition to the new simplified return format with least hassles is the way forward for GST now.

Revenue position: Still a tall order

The first two years of GST passed through three phases: teething troubles in the initial months; rate cuts to improve corporate profits and reduce consumer prices in subsequent months, and most conspicuously, relaxations in tax compliance along the entire time period.

Yet, officials from the finance ministry ensured that growth in GST collection does not remain subdued. Monthly gross GST collection grew by more than 10 per cent year-on-year for six consecutive months in the second half of FY19. Average monthly collection in a financial year grew nine per cent in FY19, and in the first two months of FY20.

However, slowing GDP growth in April put the brakes on the growth GST collections in May, which were up a mere 6.7 per cent over the previous year. Thus, despite some months of better-than-average performance, the sword of Damocles still hangs over the revenue department’s head with the prospects for economic growth in the shadow zone.

“Booming economic growth is the only solution for GST collections to improve in the medium term. Rising compliance, as we have observed in our analyses, can help only to a very limited extent; say about 1-2 per cent rise in the overall monthly collection. We need nearly 20 per cent growth to achieve this year’s targets,” said a senior finance ministry official.

The asking rate for FY20 for monthly collection is nearly Rs 1.18 trillion. This makes the enforcement measures key to improving revenues in the coming years.

No wonder then, that just before GST’s second birthday, the Central Board of Indirect Taxes and Customs (CBIC) chaired a meeting with its field formations on two key aspects that need severe correction: fake invoicing and e-way bill frauds under GST.

Countering those who game the system: Will new return format help?

There are three specific things in the GST process that matter: supply (of goods or services), raising of an invoice (transaction on record) and paying tax (final step of compliance).

Using permutations and combinations of these three, there are three broad and different ways of gaming the system: fake invoicing, under-reporting and tax evasion. Nothing is new: these were existent in the erstwhile excise regime, too.

Fake invoicing: Supply does not happen, invoice is raised, tax is paid

Under-reporting: Supply happens, invoice is not raised, tax is not paid

Tax evasion: Supply happens, invoice is raised, tax is not paid

The current return formats—output tax liability in GSTR-3B, inward supplies auto-populated in GSTR-2A and monthly sales return GSTR-1—has multiple forms and fields on the GST portal, which at times gets confusing for the smaller and the medium sized taxpayers. The new return format compresses all this data into a single form, with three different types—Saral, Sahaj and Sugam—for different categories of GST payers.

Officials and experts are clear that the new return format would not be of any help in curbing the first two types of frauds. The only area where the new format would be of help is the tax evasion part.

While uploading all invoices is not mandatory for the supplier or vendor under the current regime, the GSTR-2A does not auto-populate properly. Though this does not introduce problems in calculating the tax liability, it fails to accurately ascertain the eligibility of input-tax credit (ITC).

So currently, ITC is being claimed mostly by self-reporting in GSTR-3B. But most ITC eligibility will be lost if it is found that the vendor / supplier has not paid tax (third possibility from the list above). As invoice matching is not being done, ITC is being claimed in many instances where tax is not being paid.

The new regime under new return format will compel the vendor/supplier to raise all invoices properly and file returns timely; as failing to do so, the buyer will not be eligible for the input-tax credit. So the buyer will ensure that he deals with the right supplier who is compliant, which will reduce evasion to a good extent.

“If seller does not upload invoice or uploads an incorrect invoice, there is a clause for provisional credit under the new format system, but with limitations. The seller would have to be fully and regularly compliant for big buyer companies to avail credit,” said Archit Gupta, CEO at ClearTax.

The first two possibilities, which are quite rampant, would not get any help from the new return format. The only way they can be dealt with them is enforcement measures, sample surveys and surveillance measures, said Pritam Mahure, a Pune-based chartered accountant.

“The new format has limited benefits but is going to become too tedious for big companies, who are the biggest contributors to the GST kitty. It will be a challenge for them to check all invoices on a monthly basis. It remains to be seen how the government minimizes the hassles,” Mahure said.

The only area of improvement that remains is e-way bills. Frauds such as using the same bill for movement of multiple consignments within 24 hours have become very common, observers say. To tackle this, the mandatory requirement of specifying 6-digit HSN code (harmonized system nomenclature used in customs universe) for the goods supplied.

“This would reduce e-way bill frauds to some extent,” said another official from the finance ministry who overlooks GST. Putting all pieces together, while the new format does have considerable potential to improve revenues, it might turn out that its positive impact gets restricted. What happens remains to be seen in the coming years.

GST Revenues: Strong Rise and Recent Fall
Growth in monthly GST collections
Month  Growth (% yoy)
August 2018  0.4
September 2018 
October 2018 5.9
November 2018  13.6
December 2018  13.2
January 2019  15.3
February 2019  10.4
March 2019  19.4
April 2019  10.1
May 2019  6.7
Note: Gross revenues before netting out refunds; Source: PIB press releases

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