Given how revenues from GST have been slowing down over the past few months, and the poor compliance in terms of filing returns, the GST Council’s decision to go ahead with the inter-state e-way bill from February is understandable. It is also not surprising that the Council is toying with the idea of applying the reverse charge mechanism (RCM) to the composition scheme, where the collections suggest evasion is rampant. While some have interpreted the finance minister’s talk of anti-evasion measures—after the 25th meeting of the Council on Thursday—as adversarial, the collections suggest industry has been taking the tax payments way too casually. To its credit, the government has said it is willing to re-design the invoice-filing mechanism to make it simpler, based on a presentation made by Infosys chairman Nandan Nilekani. The core idea of the new mechanism, to be finalised at the next Council meeting, appears to be to make buyers and sellers responsible for matching the invoices rather than the letting the system do it.
In a nutshell, the seller would upload a sales invoice, which would then be verified by the buyer. Only once the buyer verifies the invoice, would he be eligible to claim input-tax credit for the purchase. In the current system, the GSTR1 form is uploaded by the sellers, following which the GSTR2—a confirmation of the transaction—is auto-populated. Given 90% of assessees have an average of 50 invoices a month, the new system should not be too onerous. It also incentivises the buyer to push the seller to upload the sales invoice.
How well the system will work would be known only later, but the mechanism must allow the tax authorities to keep track of tax paid by sellers on a real-time basis. If the authorities cannot track the transactions fast enough, it would be possible for suppliers to get away without paying the tax and merely uploading an invoice. Tax experts believe this can be an interim solution till the earlier mechanism—with the GSTR1, GSTR2 and GSTR3 forms—is improved upon. Also, while letting industry do the invoice-matching is a good idea, the taxman needs to keep doing data analytics to get more information on, say, the likely income of assessees. Bringing in the reverse charge mechanism for assessees under the composition scheme is a good idea since, as the FM observed, the collections are a matter of concern. The collections of just Rs 307 crore for the September quarter, across some six lakh taxpayers, assuming an average tax incidence of 2%, suggest an average annual turnover of Rs 10 lakh. Given businesses with a turnover of below Rs 20 lakh per year don’t even need to pay a GST, there’s clearly large-scale evasion taking place. Imposing a RCM would require the buyer to pay GST on behalf of the firms from where the purchase is made, allowing the authorities to keep track of transactions.
A quick decision and rollout should help push up the GST collections, which came in at just Rs 80,808 crore for November compared with Rs 95,000 crore for July. Continuous cuts in the tax rates have meant some sacrifices for the government. The latest round of cuts will mean a revenue loss of about Rs 1,200 crore. Nevertheless, some of the cuts were needed to remove anomalies—sales of second-hand cars, for instance, will now be taxed a lower rate than new cars, instead of attracting the the same rate.