Make the system efficient, effective, flexible and fair

The introduction of a goods and services tax (GST) in India will be far more than a mere reform of the Indian indirect tax system; it will also be very significant economic reform. In a well-designed GST regime, only the expenditure on final private consumption should be taxed. Registered businesses should charge GST on taxable goods and services they provide, and claim credits for GST they pay on their purchases, including capital purchases.

A well-designed GST regime will significantly reduce Indian businesses' cost base from that in the current system, as GST will not become a cost to the registered businesses. Indian businesses will become more competitive internationally as a result.

The OECD recognises that a key feature of a well-designed GST is a system that is efficient and effective. That is, compliance costs for business and administration costs for government should be kept to a necessary minimum.

Here, we focus on one aspect of the compliance burden being considered under the proposed Indian GST and check out whether this is the best international practice.

Under the proposed GST regime, all GST registered businesses are required to uplift all supply information through the goods and services tax network (GSTN) portal by the 10th day following the close of a month. In order to claim an input tax credit, the purchaser must upload all purchase information by the 15th day following the close of that month. A credit will only be available where the purchaser's invoice matches the sales invoice uploaded by the supplier and the GST has been paid. The GSTN will notify the purchaser of a mismatch.

Under this approach, it will be almost impossible for a business to claim its credit entitlement on a timely basis. The delay in claiming credits and the costs associated with managing this system alone will unnecessarily increase the working capital of businesses, eroding one of the benefits of moving to a GST.

Another feature of the proposed credit system is that all information regarding credit notes must be uplifted through the GSTN by the September 30, following the year of income. Unless disputes are resolved by that date, no GST credit will be available to the supplier if the invoice value is reduced. The purchaser on the other hand will almost certainly be entitled to a credit for the reduced amount. The consequence would be an increase in costs/cash outflow where details are unable to be reconciled, leading to a GST cost or repayment of credits incorrectly claimed with interest payable to the government.

We note that no other developed country with a value added tax or a GST system has such a credit matching system. If the Indian authorities are concerned about fraudulent or even the incorrect claiming of refunds or credits, there are better and more sophisticated ways of managing those risks, including sophisticated approaches to gathering intelligence and enforcement.

The proposed credit matching system will almost certainly cost Indian businesses significantly in unclaimed credits and additional compliance costs. Further, the cost for administering this system to government will be significant.

In our view, it is likely the revenue at risk from fraud or credit claims made in error is significantly less than the combined business and administration costs associated with the proposed system. It is also inconsistent with a key OECD feature of a well-designed GST system; that the system be efficient, effective, flexible and fair.

Denis McCarthy, Executive director, PwC India
Anita Rastogi, Partner (indirect tax), PwC India