DG Audit to scrutinise accounting software of service firms to ensure right GST allocation to states

In order to prevent incorrect allocation of GST revenue among states, the Directorate General of Audit has been asked to scrutinise the accounting software of large service providers like banks and telecom companies, an official said.

The issue concerning allocation of revenue in case of inter-state supply of services was raised by some states during high-level meetings between the Central and state tax officers to analyse reasons for Goods and Services Tax (GST) revenue shortfall, the official said.

Some states have expressed the apprehension that service providers might not be depositing the taxes collected from customers to the state exchequer where they are rightfully due. Instead, they are depositing in some other states where they are not due as per the GST rules and regulations of Place of Supply (PoS).

Under the PoS rules, the taxes are required to be paid at the place of consumption. However, in case of services it becomes difficult to identify the place of consumption and hence, the GST regulations have laid down elaborate rules for appropriation of taxes by states.

"The DG Audit will check whether the accounting softwares of service providers who are operating in different states are depositing the taxes with the states where they legitimately accrue," an official told PTI.

The DG Audit has been asked to give its report within three-four months.

The official said that since GST is a new tax, it is likely that the service providers may not be depositing the taxes correctly to the states which are entitled, especially with regard to banking and telecommunication sectors.

In case of banking and financial services, the PoS is the location of the recipient of the services. However, in case the location is not known, the PoS would be deemed to the location of the supplier of services.

In case of post-paid mobile connection, the PoS is the billing address of the recipient.

As regards pre-paid vouchers for mobile, internet or home television, the PoS would be deemed to the address of the selling agent or distributor as per the record of the supplier.

However, in case of online recharges, the place of depositing GST will be the address of the recipient of service on record with the telecom companies.

For the hospitality industry, the PoS would be the location of the immovable property.

Similar regulations have been laid down for other services like insurance, passenger transportation and transportation of goods including by mail or courier.

The DG Audit would go into the details of software being used by service providers to ensure whether the GST collected is flowing to the states as specified under the regulations, the official said.

Finance Secretary Hasmukh Adhia has met GST officers, both from central and state tax departments, in certain states to understand issues plaguing the GST collections.

A discussion to shore up revenues has already happened with six states -- Punjab, Himachal Pradesh, Puducherry, Jammu & Kashmir, Bihar and Uttarakhand.

The states faced an average 16 per cent shortfall in GST mop up in the first year of implementation (July 2017-March 2018), which has come down to 13 per cent during April-August period of current fiscal.

While only six states -- Mizoram, Arunachal, Manipur, Nagaland, Sikkim and Andhra Pradesh -- are facing revenue surplus in the current fiscal, 25 states are staring at revenue shortfall and have to be compensated by the Centre.

The 10 states which are facing maximum revenue shortfall during April-August are Puducherry (42 per cent), Punjab and Himachal Pradesh (36 per cent each), Uttarakhand (35 per cent), Jammu and Kashmir (28 per cent), Chhattisgarh (26 per cent), Goa (25 per cent), Odisha (24 per cent), Karnataka and Bihar (20 per cent each).

In 2017-18, the Centre had released Rs 41,147 crore to the states as GST compensation to ensure that the revenue of the states is protected at the level of 14 per cent over the base year tax collection in 2015-16.

In current fiscal, there has been a spike in the bi-monthly GST compensation paid to the states by the Centre during June-July.

The Centre paid Rs 14,930 crore to compensate states for revenue loss incurred in June and July, a nearly four-fold jump compared to Rs 3,899 crore paid for the months of April and May, as per latest available data.

AMRG & Associates Partner Rajat Mohan said there are a large chunk of compliant taxpayers who have by mistake paid taxes according to wrong 'Place of Supply', leading to incorrect allocation of revenue among the states.

"This issue would result in widespread litigation, not only between taxpayers and states, but also among different states," Mohan said.