Digital economy: How blockchain technology is changing the GST regime

Goods and services tax (GST) is one of the boldest, most encompassing reforms in the indirect tax regime. It has brought down the number of documents to be maintained by an assessee to only two: tax invoice and E-way Bill. The tax invoice is the fundamental document, which is required at each and every stage of the supply chain starting from the point of confirming a purchase to the filing of returns. The “invoice” has become a single point of information for all the parties involved in a commercial transaction. The E-way Bill is the second point of information in a commercial transaction. It will track the flow of goods from the seller to the buyer and will serve as final proof of destination.

 

The value of these two documents under the GST regime can be immense if they are accessible at every stage of a transaction. The question is - how can we make this data available to everyone without duplication of documents and wastage of time and resources? The answer lies in use of Blockchain technology.

 

What is blockchain?

 

“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” (Don & Alex Tapscott, authors of Blockchain Revolution).

 

Allowing digital information to be distributed but not copied, blockchain technology created the backbone for a new type of internet interaction. The blockchain database isn’t stored in any single location, meaning the records it keeps are truly public and easily verifiable. No centralised version of this information exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet.

 

The Finance Minister in his 2018 Budget speech had specifically pointed out that the government will explore the use of blockchain technology to add muscle to the digital economy. The significance of this statement in the overall scheme of things clearly points to a technological revolution for which the government is ready.

 

Benefits to the GST regime

 

Documents in a blockchain are continuously monitored and hence if an invoice is updated all the interested parties have access to the updated document on a real-time basis. This will prevent wastage of time and resources in sending the updated document back and forth. Also, the E-way Bill can be directly available to the supplier and the buyer on a real-time basis. Both these objectives can be achieved provided these documents are generated from a single source.

 

The E-way Bill rules state that it can only be generated through the GST Network. Similarly, invoices may also be centrally generated through the network. This new system will involve creating a new module for use in both business and government. It may be called the Invoice Generation System (IGS).

 

The government will own the IGS. Invoices would not be generated in private software as they do now. Instead, firms would use IGS for preparing tax invoices. This will ensure that the government gets the relevant data at the time of invoice generation; there’s no need to wait for the filing of returns by firms.

 

Another important area is Input Tax Credit (ITC) claims. The flow of credit in the indirect tax regime should be smooth and transparent in order for the benefits to accrue to every eligible taxpayer. Blockchain will ensure that every claim of ITC is cross-verified with the payments made. This will, in turn, have a secondary benefit that it will remove the requirement for filing monthly returns as the system already has the required information.

 

The GST regime has allowed a refund of tax only in two cases: firstly, for zero-rated goods i.e. exports and secondly, for assesses covered under the inverted duty structure. Currently, the GST Network, which is in its infancy, has been plagued with numerous technical glitches. Although the refund process has been started, refunds of only exporters who have exported goods after payment of tax are flowing. Blockchain will help speed up refund claims and eventual payments.

 

Blockchain will be beneficial for the tax officials who are in charge of assessment. The involvement of all the parties in the system will ensure that Assessing Officers (AOs) are aware of any error, omission or misrepresentation made, this helps keep a check on the assesses.

 

In order to completely do away with the interaction between the assessee and the AO, each assessee will be assigned a unique identification number which will be their identity. This may be linked to a secure document such as Aadhar. The AO will only know the assessee as a number and would be assigned for assessment on a random basis depending upon various criteria predefined in the system. This eradicates contact completely as there is no communication whatsoever between AO and assessee. Further, this also seems to be the desire of the Finance Minister based on his Budget speech.

 

The writer is chairman, Haribhakti & Co. Rishit Thakker also contributed to this piece