GST enforcement: A fine balance in catching fraud, not harassing taxpayers

It’s a tough balancing act for the Central government.

On the one hand, it is dealing with fraudulent activities of over Rs 50,000 crore related to goods and services tax (GST). On the other hand, it is facing criticism for the stringent measures it has taken to curb fraud because it could increase the compliance burden for honest taxpayers.After giving leeway in the initial years, the Centre in November 2020 started a drive in coordination with the states to deal with fraud and evasion. In the past 18 months, it has detected fake input tax credit (ITC) of over Rs 50,000 crore.

The amount is astounding. Stakeholders and tax experts have applauded the efforts and the due diligence that went into it. The recovery, however, is below the anticipated levels. So far, the government has got Rs 2,500 crore from the drive, following the booking of more than 6,700 cases and detaining over 600 people.

The government has tightened GST norms. But some of the changes have caused “inconvenience” to taxpayers, to say the least.

It might be mentioned here that for 11 months in a row, GST collection has been above Rs 1 trillion, and the key factor that has contributed to this has been effective action against errant taxpayers.

Anti-evasion measures

Early this year the government made changes such as a higher rate for footwear and making online restaurant aggregators such as Swiggy and Zomato pay GST on the services provided through them. The nodal department — the Central Board of Indirect Taxes & Customs (CBIC) — has toughened GST rules on outward supplies. It has now become vital that the outward supplies in the GSTR-1 and GSTR-3B match.

It seems there is more to come. The GST regime is expected to see an overhaul with a ministerial panel, set up by the GST Council, proposing a slew of data analytics-led enforcement and registration measures to plug leakages and boost collection. The eight-member panel, headed by Maharashtra Deputy Chief Minister Ajit Pawar, is learnt to have prepared a report, which could be taken up by the Council in its upcoming meeting. The panel is believed to have suggested ways to identify fake invoices, dubious transactions, and high-risk taxpayers by using data analytics and machine learning. The proposed measures include biometric verifications and physical verifications of premises of high-risk businesses flagged by the system as a prerequisite for registration.

The panel has recognised integrating government databases is required to keep errant taxpayers in check. It is learnt to have proposed validating bank accounts through the National Payments Corporation of India (NPCI) data.

Increase in compliance burden

The government is curbing non-genuine/fake transactions using technology -- Business Intelligence and Fraud Analytics -- by which field officers can detect and analyse abnormal trends. This is apart from blocking GSTR-1 in case the GSTR-3B return of the previous month was not filed, etc.

Even though these have shown success, the ease of doing business needs to improve in this area, said experts.

“Various provisions introduced recently affect a genuine taxpayer while it may have a lower impact on an evader. Therefore, measures that identify culprits faster without impacting minor defaulters and taking swift action on them would provide better results,” said Kunal Wadhwa, partner (indirect taxes), PwC.

He suggested a tracking mechanism to analyse HSN (harmonised system of nomenclature) codes for inward-outward supplies, especially for traders.

Experts say the government should recognise there has been a substantial increase in investigation, including the overlapping probes by the Centre and State GST formations.

“While the government’s action to curb bogus invoices is desired, this menace needs to be tackled using effective technology and risk-based assessments. Guidelines need to be issued to field formations to avoid inconvenience to honest taxpayers. Further, during rate rationalisation, it should be ensured that there is minimal breaking in credit chains,” said Bipin Sapra, tax partner, EY.

Auditing business

Tax authorities are learnt to be focusing on auditing firms to improvise return filing.

“Such exercises are significant as they help in detecting irregularities and fixing business issues. It involves scrutiny of documents, such as audited financial statements, income-tax returns, and details of customers and suppliers. In case the audit detects any mismatch in purchasing items, a show-cause notice can be issued, but it has to be served after informing the entity concerned and in a stipulated time period,” CBIC Chairman Vivek Johri told Business Standard.

According to industry stakeholders, even though the government’s intent has been to create a tax-friendly environment, implementation could hurt if it is not rational. Regular and coordinated action would go a long way in creating trust among taxpayers.

The GST regime has undergone many changes as it evolved in the past five years and has done lots of positive things in favour of taxpayers. However, legal knots at various judicial forums remain a challenge. To combat that, a resolution or a dispute settlement mechanism could be set up.

STATUS CHECK
 

• Special drive in coordination with states since November 2020

• Detected GST frauds, evasion of about Rs 50,000 crore in 18 months

• Recovery from detection far below the expectations

• Bogus bills still persist in some sectors

• Audit of businesses among key focus areas 

• Analytic-led enforcement and registration measures in the work

• Tightening of compliances causing inconvenience to genuine taxpayers