By Najib Shah
The tax gap — the difference between what ought to be collected as tax revenue and what actually is collected — has always been a matter of concern for tax administrations the world over. How big or small the gap is always is a matter of conjecture, or as the classic parliamentary reply has it, ‘Since evasion is a clandestine activity, it would be difficult to give an estimate of the extent of evasion.’
There is a universal agreement, however, among tax administrators that there is evasion. While estimates in India vary wildly, it has been suggested by experts that the extent of evasion of indirect taxes is 15-20% depending on the commodity and geographical area. Translated in actual terms, this would mean 15-20% of about .Rs15 lakh crore, which is the amount of indirect tax estimated to be collected between the Centre and the states in the goods and services tax (GST) regime.
Is evasion a cultural issue? Is it a lax tax administration? Or worse still, is it about corruption and collusion? The truth, like in all such matters, lies somewhere in between. How does this evasion take place? From the outright clandestine removal of goods to the more sophisticated misuse of the credit scheme.
How to claim buried treasure
In this background, it makes eminent sense to adopt the use of technology to reduce the scope for evasion. With tax assessments being entirely trust-based, returns are a key to enable risk-based audit and controls. This is more so in a credit-based tax system like the GST that operates on the system of ensuring there is no tax on tax, and the credit of tax paid at the earlier stage is available for discharge of liability created at a later stage.
This is the GST regime’s USP. Hence, to the extent of the credit availed, there is less revenue available with GoI. While it is not anybody’s case that such credit should not be available, it also cannot be anybody’s case that credit not due is availed of. In the GST regime, this becomes even more important since the silos of the pre-GST regime have been removed and a seamless flow enabled.
Value added tax (VAT), as has been pointed out, is the only tax that requires the government not only to collect substantial money, but also pay much of it back to the same people in the form of input tax credits. An invoice provides a way to track the date on which goods were sold, how much money was paid and if there is any outstanding debt. This makes the invoice a key document.
An invoice constitutes a potential claim on public funds. Falsifying such claims is the most common form of central excise/VAT fraud. Hence the emphasis on invoices in GST. The law stipulates that every taxable person supplying goods or services issue a tax invoice showing description, quantity and value of goods, and the tax charged thereon.
Similarly, the provisions dealing with returns prescribe the number and manner of filing returns accompanied with invoices. The law further stipulates the matching of the details of inward supply with the corresponding details of outward supply and penal consequences, where such matching does not take place.
In the immediate aftermath of the launch of GST and the multiple teething problems that followed, GoI has gone slow on audit and enforcement.
While in the absence of returns itself being filed it’s too early for audit, enforcement activities have been shelved for the possible negative perception they would create. And matching has not started in the absence of GSTR-2 and GSTR-3 being filed.
Committees have been constituted to look at difficulties of the taxpayer. GoI should not agree to any recommendation seeking to amend the returns filing whereby matching becomes difficult. Yes, there has been severe criticism of this feature by some economists and the matching process does involve ahumongous number of invoices. But then the GST Network (GSTN) was always aware of this requirement and has the necessary bandwidth to deal with the numbers.
Matching is non-obtrusive and will act as a deterrent against evasion. It is abetter way to go forward than e-way bills, which will bring back the checkpost regime.
As economist Joel Slemrod had written right at the start of his 2007 paper, ‘Cheating Ourselves: The Economics of Tax Evasion’ (goo.gl/qW3m7G), “No government can announce a tax system and then rely on taxpayers’ sense of duty to remit what is owed.” While audit and enforcement will have limited success, technology-driven matching of returns is the key. GoI cannot afford to lose revenues due.
*The writer is former chairman, Central Board of Excise and Customs