Handle with care

GST notices should not become a tool for harassment

The goods and services tax (GST) authorities have started knocking at the doors of assessees. As reported by this newspaper on Monday, about 50,000 show-cause notices have been issued so far to companies and partnership firms in sectors such as jewellery and real estate. These notices are a result of the first comprehensive audit exercise since the implementation of the new indirect tax regime. The authorities have mostly covered the returns filed for the first two years (2017-18 and 2018-19). In some cases, returns have also been audited for later years. Different reasons have been underlined for issuing notices, such as non-payment of taxes, incorrect declaration, incorrect classification of goods and services, mismatch in sale and purchase of goods, and wrong input tax credit claims. It is likely that some firms and businesses may not have filed returns as mandated by law, but the numbers are still worrying for a variety of reasons.

It is worth noting here that notices have been issued to firms in only a few sectors. As the scale of scrutiny increases, the number of notices would also increase significantly. It is not clear if the system has the capacity to follow up a large number of cases. Further, these notices have been issued under different sections of the Central GST Act. It has been reported that states have also started the audit exercise, and it is reasonable to assume they will also have queries. As the provision of compensation against the shortfall in GST collection by states has ended, there would be pressure on state authorities to generate more revenue. A shortfall in tax collection, pressure on officials to bring more revenue, and limited tax administration capacity could lead to harassment and litigation. It must be recognised that GST is a complicated system with multiple rates. Its implementation also faced a number of challenges in the initial years, which itself could have led to confusion and mistakes in the filing of returns.

The tax administration, both at the Central and state levels, would be well advised to keep all these things in mind while questioning assessees. It is nobody’s case that the tax administration should not go after those not filing taxes or gaming the system, but it must also recognise the circumstance in which the new indirect tax system was implemented. Sending notices is not an end in itself and may not actually lead to higher revenue, as assessees may choose to contest, which would lead to litigation. The tax administration should, therefore, proceed selectively, at least for the initial years, to avoid harassment. This would also help it build capacity.

Meanwhile, the GST Council should further simplify the tax system. It did well in its last meeting by decriminalising certain offences and raising the monetary threshold for starting prosecution. The Council, however, could not consider the report on forming appellate tribunals. It must clear the way for setting up appellate tribunals at the earliest as they would not only help assessees, but also strengthen the system. Another pending issue is rate rationalisation. A reduction in the number of slabs will not only simplify the indirect tax system but also lead to a higher revenue collection and ease the pressure on tax administration.