The GST dilemma

Design framework and tax evasion pose counter challenges

The reality of goods and services tax (GST) in the field is that there is tax evasion on one side and administrative hurdles on the other. First, the tax administration has not been able to fulfil the promised objective of providing a tight infrastructure to weed out evasion. Second, the administration and the taxpayer have to contend with continuing changes in GST rates made by policymakers with a frequency not witnessed anywhere else. Third, new laws in other sectors have conflicted with GST implementation. Fourth, large businesses are as much prone to tax evasion as small, lending a touch of implausibility to the tax. Fifth, examination of systemic deficiencies and correcting them promptly are missing. 

Possibly, the biggest challenge from the administration’s point of view has been its inability to auto-populate linked information from one tax form to another even though that is quintessential to success. Shorn of technical detail, essentially there are three GST Forms — 1M, 2A and 3B. Let us call them 1, 2 and 3. The taxpayer has to report his sales in Form 1, each row showing one sale. The columns in the form comprise GST number, detail of invoice issued, GST rate applicable, central GST value/amount, state GST value/amount. The total tax revenue collected by this taxpayer for the Centre or states is obtained when the CGST or SGST column is aggregated.  

Form 2 shows the taxpayer’s purchases. Here, too, each row represents one purchase and the columns show the GST number, detail of invoice received, the rate of tax paid, and the value of CGST and SGST paid. Aggregating CGST or SGST columns yields the value of CGST or SGST paid on purchases by the taxpayer. Importantly, this amount comprises the input tax credit (ITC) that the taxpayer has the right to claim back. 

Form 3 is the GST return (tax return for GST). The columns show the tax liability, which is the value of tax collected on sales minus value of tax paid on purchases (ITC). Additional columns show how much of the tax is paid in the form of cash, and how much through accumulated credit (AC). AC is shown in an electronic ledger tracking how much tax is paid using cash and how much using ITC. 

If output value is higher than input value as should usually be the case, one may expect that tax paid on inputs would be lower than the tax paid on output. But that is not always the case. It is not rare for ITC to get accumulated since the GST rate on output could be lower than on input, or ITC could be statutorily given over a period of years, or upon proof of documents — such as for exports — to the satisfaction of the administrator, or ITC could be held up reflecting a lack of clarity in the determination of correct classification of an imported input, or for various other reasons. Therefore, it is quite possible to pay GST in year two with both AC from year one and the remainder with cash available in year two.     

The major continuing lacuna is that forms 1, 2 and 3 were intended to be electronically linked but are not. Form 3 should have been automatically (electronically) populated as soon as the GST number of a taxpayer entered form 1 or 2. There should ideally be no requirement or possibility for a taxpayer to enter information into the three forms separately. But that is what is occurring even though the public-private partnership, that is managing information technology aspects currently, was supposed to have designed the electronic inter-connectivity of the forms. The introduction of GST without this basic linked-framework is now rearing its head in tax evasion.

Essentially, GST without the innovation of linkages yielded by auto-population means that it is not fundamentally different from India’s earlier indirect tax structures. Similar modes of evasion continue under GST. One method of evasion is claiming huge amounts of tax payment through AC. Without field investigation there is no way to find if the AC used to pay tax reflects the true picture. As a Latin American finance minister once confessed to me in frustration, “Doctor, in my country, there are a lot of elephants hiding among the mice”. Indeed, many large corporations appear to be building up AC through which tax is being paid. Some of it may certainly be legitimate, reflecting GST’s structural deficiencies or delay in processing. But that cannot be the entire story.

Another method is to show large and false turnover and, together with it, large input costs. This serves a triple purpose of satisfying shareholders, satisfying lenders for seeking bigger loans, as well as building up AC on paper, even though actual purchases (and sales) could be much lower. False AC limits GST revenue collection in cash, in turn constraining government expenditure disbursements and increasing the pressure on tax collectors to increase collection willy-nilly, in turn limiting legitimate ITC claimed by honest taxpayers.

Fake invoices also have been used by brokers who are used by company executives in particular sectors. Unbeknownst to the executives, such brokers are the ones who make illicit profit through exploiting such businesses that they are supposed to serve. The Bankruptcy Code has not helped. It allows taxpayers to hide behind Section 13 on non-performing assets (NPAs). Once allowed, then tax liability under GST is set aside. 

On the flip side, the frequent dropping and jamming of the GST website for uploading and other functions have to be successfully mitigated if good taxpayers are expected to comply on time. Terminating GST registration when a supplier goes out of operation should be considered automatic rather than pending the process for little reason. Many other impediments continue against the good GST taxpayer. 

Ultimately, how GST fares will depend on the Indian taxpayer’s attitude towards paying tax. But complementary policy and administrative actions are imperative. Policymakers should produce a consistent and stable tax rate structure; the PPP model for auto-populating forms should be achieved without delay; and facilitation by the administration in refunds, de-registration and other functions should not be thwarted by the administration to meet revenue objectives. Only then, GST can be considered a success.