By Brijesh Kothary
As we enter the third year of GST implementation, the focus of GST Council appears to be shifting from rate rationalization and compliance simplification to revenue growth. There have been various representations from the trade and industry, particularly renewable energy, automobile and real estate sectors for restructuring of tax rates to boost growth. There is no doubt that the Government is receptive to such demand, however, the priority for now is clearly on securing the revenue.
As per the interim budget data, the Government expects growth of over 19% in GST collections in the year 2019-20. It is estimated that there has been a shortfall of about Rs. 1,00,000 crore in GST revenue earned in 2018-19, compared to what was forecasted. The shortfall was expected given that the GST rates for several goods and services have been reduced from time to time. What has really taken the authorities by surprise is the decline in the number of entities filing returns and upsurge in the cases of tax evasion.
Given the above, the GST Council, in its 35th meeting, has laid stress on simplicity and flexibility in furnishing of returns and development of a robust system of raising red flag for real time identification of fraudulent activities. Modus operandi adopted to evade payment of indirect taxes can be broadly categorized as below:
a. Invoices out of system
b. Undervaluation
c. Non-payment of taxes - Missing taxpayer
d. Inflated tax credits
In this era of self-assessment, the enforcement authorities are not only expected to interpret the tax laws, but also understand the way the economy functions. They must equip themselves with emerging laws that have a bearing on efficient tax administration. The Directorate General of Audit has recently issued audit plan for the year 2019-20 by dividing the assessee based on their turnover and certain local risk parameters. Additionally, some of the tools that may help the authorities in increasing fiscal space and make taxation simpler and more predictable for the taxpayers, are discussed in the below paragraphs.
Electronic invoicing system
An electronic invoice is issued, transmitted and received in a structured data format which allows for its automatic and electronic processing. Electronic invoicing system is prevalent and widely adopted in Latin American countries. It helps to reduce operating expenses by eliminating paper and data entry and automating workflow. It also enables real-time/online view and traceability of invoice-related documents and eliminates the possibility of falsification.
Rule 138(2) of the CGST Rules provides for generation of Invoice Reference Number (IRN) from the common portal by uploading the details of tax invoices in FORM GST INV-1 in lieu of tax invoice, which would be valid for thirty days from the date of uploading. Once IRN is integrated with the ERP system, the assessee would be freed from the inconvenience on account of multiple data entry for furnishing of returns and generation of e-way bills. This would also substantially reduce the issues relating to verification of input tax credits.
In the 35th meeting, the GST Council decided to introduce electronic invoicing system for B2B transactions. It is proposed to be rolled out in a phased manner from January 2020. It is expected to help tax authorities in combating tax evasion. The emphasis would be to lay down electronic trail at every stage of supply so that the fraudulent seller is identified real time or at the earliest. The government has also proposed for inclusion of Quick Response (QR) Code in the tax invoices and bills of supply, to boost digitization.
Denial of facility to generate e-way bills for non-furnishing of returns
Rule 138E of the CGST Rules lays down restriction on furnishing of information in PART A of FORM GST EWB-01 if a person, whether as a supplier or a recipient, fails to furnish the returns for two consecutive tax periods. This restriction has been introduced in order to secure the revenue of the government and also to ensure strict adherence to payment of taxes and filing of return by assessees.
If the rule relating to generation of e-way bill is not complied with, GST laws provide for confiscation of the goods or imposition of a penalty (that is equal to the tax payable on the goods being transported) on the owner of goods as well as the transporter. There has been plethora of judgments from various High Courts on issues relating to non-generation of e-way bills, detention of goods, imposition of penalty, etc. E-way bill system has played a vital role in curbing the practice of invoices generated out of the system.
As per Notification No. 22/2019-C.T., dated 23-4-2019, the above rule should have come into effect from 21-6-2019. The GST Council in its 35th meeting however recommended extension of applicability of Rule 138E of the CGST Rules by 2 months and Notification No. 25/2019-C.T., dated 21-6-2019 has been issued to this effect.
Validation of e-way bills through RFID tags
The Radio Frequency Identification Devices (RFID) use radio waves to identify certain objects. In RFID, a microchip is attached to an antenna, for transmission of information to a reader. The reader converts the radio waves into digital information that can then be passed on to the computers for validation.
Uttar Pradesh became the first State to implement RFID tags from November 2018, for verification of e-way bills generated for transportation of goods in the State. In this system, the user uploads the details of e-way bills into this device. When the vehicle passes through RFID tag reader, the reader detects the details fed into the device and transmits the same to the government portal. This data can be used by the revenue authorities to validate the supplies made by the assessees.
With the help of a central server, the person manning computer may get to know if the e-way bill has been generated for the vehicle. This system may not completely eliminate the process of manual verification of goods by revenue authorities but can restrict the manual verification to those cases which involve transport of sensitive goods, where there is a suspicion that the movement of goods is being done in a fraudulent manner.
Though no decision has been taken by the GST Council on this aspect as yet, the government intends to install RFID tag readers to record the details of goods transported by the vehicle with RFID, thereby reducing the manual intervention for verification of goods. This may prove to be an effective tool to identify and track goods and resolve the issue of circular trading.
Geo-tagging of premises
Geo-tagging is the process of adding geographic information about digital content, within metadata tags, including latitude and longitude coordinates, place names and/or other positional data. The Ministry of Corporate Affairs has made it compulsory for companies incorporated on or before 31-12-2017 to furnish e-form INC-22A ACTIVE (Active Company Tagging Identities and Verification). The form inter alia mandates furnishing of latitude and longitude coordinates of the registered office of the company.
The GST authorities presently undertake post registration field visit to satisfy themselves regarding genuineness of documents furnished during registration. If the tax officer is not satisfied, he can re-initiate the field visit or even initiate cancellation of registration. The application form seeking details of a person for the purpose of registration under GST law (FORM GST REG-01) provides fields for entering latitude and longitude coordinates of the place of business for which registration is sought; however, these fields are not made mandatory as yet.
The government is leveraging technology and geo-tagging facility is used to tag various assets created under different welfare schemes of the government. The present move of geo-tagging of premises is expected to curb shell companies and going forward the government intends to halt proliferation of companies used for money laundering. This facility can be utilized by the authorities to zero in on companies with a common address, contact numbers, etc. and sudden and unexpected changes in revenue that may warrant a closer look into their affairs.
New returns with ITC matching functionality
The GST Council, as per Press Release dated 21-6-2019 has laid down the schedule to migrate to the new GST return functionality. As per the transition plan, the assessees may familiarise themselves with the new functionality by using trial offline tools to upload the details of invoices and view/download the details of inward supplies on the common portal, for the period July to September 2019.
The GST Council has recommended for introduction of new return in a phased manner. Large assessees (with aggregate annual turnover in the previous financial year more than Rs. 5 Crore) would be required to upload the details of outward supplies in FORM GST ANX-1 from October 2019 onwards and furnish monthly return in FORM GST RET-01 from December 2019 (to be filed in January, 2020). To phase out the existing return filing process, the large assessees would be required to file their last FORM GSTR-1 and GSTR-3B for the months September and November 2019, respectively.
The small assessees may choose to plan their transition to the new return functionality as per the above schedule or opt for furnishing of quarterly return, wherein the taxes would be paid on monthly basis in FORM GST PMT-08. The small assessees may upload the details of outward supplies in FORM GST ANX-1 for the period October-December 2019 on continuous basis, by 10th January 2020 and furnish quarterly return in FORM GST RET-01 for the period October-December 2019 by 20th January 2020. Accordingly, the existing system of return filing is scheduled to be completely phased out by January 2020.
The new returns functionality is intended to track credit at invoice level supplies with a clear mechanism for counter-parties to reconcile accounts and mismatches and eliminate subjective assessment by tax officials. The recipient would need to accept and lock invoices else they may not be able to take input tax credit. The new functionality is programmed considering parameters like ease of compliance, alignment to business process without additional burden, and alignment to tax administration regulations. With the new simplified version of returns, the issues relating to credit mismatch are expected to be eliminated.
Data analytics
Data analytics are used to find patterns indicative of tax evasion. The patterns discovered using big data can be used either in detection or prevention of a fraudulent activities. The skills required for performing these tasks go beyond the typical accounting and taxation skillset to include statistical and computer analysis.
The revenue authorities analyse the data collected from various sources such as GST Network, National Informatics Centre (e-way bills data), Customs authorities (ICEGATE data), Income Tax authorities, etc. to get insights, including fraud analytics, sectoral patterns and hot-spot mapping for revenue collection. This information also helps in framing of government policy and forecast the effects of such policy on GST revenue collections.
Data analytics as a tool has proved to be effective for detection and analysis of circular trade and identification of dubious exporters claiming refund of taxes. It is however important to note that analytics cannot work independently in a scenario where compliance level is slipping, as data per se is not actionable. The emphasis must therefore be upon increasing the level of compliance by simplification of procedures and increase taxpayers base to formalise the economy.
Parting remarks
The Council has so far done a commendable job of steering GST in the right path by keeping economic goals above the divergent political ideologies. This is evident from the fact that not once has the Council used voting to take any of the 950+ decisions taken so far. Going forward, the GST Council has a tough challenge of striking the right balance between meeting industry’s demand for rationalisation of taxes and government’s agenda to boost growth and revenue. Effective implementation and use of the above tools would go a long way to meet the common goals in the interest of the nation.
[The author is a Principal Associate, GST Practice, Lakshmikumaran and Sridharan, Bengaluru]