Not knowing geography landing many companies in tax trouble – The Economic Times

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Many companies in the last few months have ended up filing goods and services tax (GST) in the wrong state mainly because their employees – in some cases even the business management software – did not know geography, tax experts said.

Is Ranchi in Bihar or Jharkhand? Is Darjeeling in West Bengal or Assam? Is Kannur in Kerala or Tamil Nadu? Familiar questions for a fourth standard geography student, but wrong answers to them have landed several companies, including some multinationals, in tax trouble.

Many companies in the last few months have ended up filing goods and services tax (GST) in the wrong state mainly because their employees – in some cases even the business management software – did not know geography, tax experts said.

Worse, most of this money is stuck due to bureaucratic procedures involved in claiming refunds, impacting cash flows of companies.

For most companies the amounts involved are Rs 10-15 crore per state. In some cases, companies have seen Rs 40-50 crore get stuck due to such mistakes.

Take the case of a multinational company that manufactures consumer goods, having an office in Mumbai. The company had to pay Rs 10 crore as GST in Jharkhand. The executive who was required to pay the tax returns, however, thought it was part of ‘Seven Sisters’ and paid the tax in some northeastern states, mainly Meghalaya and Manipur.

In some cases, it was only when the right state—where GST was originally supposed to have been paid—issued tax notices that the mistake was discovered.

“Corporates sometimes file GST returns in an incorrect state, which ideally should result in an inter-state adjustment as it’s merely a procedural matter,” said MS Mani, partner at Deloitte India.

However, under the GST framework, states do not talk to each other. So, forget passing on the money to the state where it should actually go, it’s a pain getting reimbursement of such tax returns or adjusting them against pending dues.

“Some states insist on the tax being deposited in one state and being refunded by another state as a separate process, which leads to avoidable working capital blockages,” Mani said.

So, if GST is wrongly paid in one state instead of the other, first the company has to pay additional tax in the right state. Then apply for a refund in the state where GST was wrongly paid. In many cases, the state that’s supposed to refund is seeking additional explanations, proofs and documents.

In some cases, the tax officials are demanding that the companies submit a comprehensive list of documents such as tax returns, national sales figures and sometimes passport copies of senior executives in case of multinationals.

Experts said it’s all uncalled for.

“Payment can be transferred wrongly on two counts, namely integrated GST versus central GST and state GST for two different state codes,” said Abhishek A Rastogi, partner at law firmKhaitanNSE -1.59 % & Co. “Both these errors are tax neutral and procedural in nature and hence must be refunded back when appropriate application is made.”

ET spoke to several senior tax advisors and some company executives who said there has been a spurt of such mistakes in 2021 as compared to last year or a year before.

Many are blaming Covid-19 for the mess as unsupervised younger employees are left with filing the tax returns from home.

In an ideal situation, such tax returns would be filed by the employee on the tax department’s website or platform, but before final submission a senior company official would take a look.

“We realise that some of these young executives are simply tired,” a partner with a tax firm told ET on condition of anonymity. “But then too, is that good enough a reason to not even Google, forget paying attention in school when they were teaching geography?”

In one instance, an executive working for a tax firm that is handling GST compliance work of an Indian automobile company did not know that Darjeeling was part of West Bengal.

“The executive paid all the GST of vehicles sold in Darjeeling in Assam,” a visibly frustrated partner of the tax firm told ET. “Now, we are running from pillar to post to convince both West Bengal as well as Assam state authorities of our mistake.”

It’s not just the employees, though. In some cases, even the ERP (enterprise resource planning) systems that track the goods have got geography wrong.

A senior financial official in a large company that ended up paying GST in Tamil Nadu for certain products sold in Kerala blamed the ERP. “When we questioned some of the executives who filed this tax return, they claimed that the ERP system was to be blamed,” the official told ET. “And we did check, only to find the executives were right, the ERP too has listed wrong cities under wrong states.”

Most companies have a compliance department in the organisation that takes care of paying GST. In some cases, companies rope in consultants for compliance.

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