Compliance Strategy for GST

Context: Amid Covid-19 times, with growth stalling, Goods and Services Tax (GST) revenue augmentation has to naturally look at better compliance. 

Positive aspects of Goods and Services Tax (GST) Regime

• Ensures a single tax system: by bringing the entire value chain from raw material to retail.
• In the pre-GST era, Centre taxed the value chain up to the manufacturing stage, and the states taxed later trade chain.
• Increased collections: In the first year of GST introduction, revenue growth of 11.9% with an implied buoyancy of 1.20, was far higher than any indirect tax in the pre-GST period.
• Services sector as significant beneficiary: reflected in decline in marginal effective tax rate for trade, transportation and financial services from pre- GST period to post-GST period.
• This is due to access to capital goods/input tax credit which was previously available only to the manufacturing sector 

Key Elements of Effective GST Compliance Strategy

• Look at taxable turnover by services companies: both from unincorporated and proprietary firms.
• Bring all economic entities within tax net: by phasing away of exemptions and introducing a GST paid on reverse charge basis on small firms, including units opting for compounding 
  • It would facilitate large companies to avail tax credits, incentivizing purchases from smaller units. 
  • Larger units could also be incentivized by SEBI to trade with micro, small and medium enterprises units on the Trade Receivables Discounting System (TReDS) platform.
• Streamline registration system: by linking it to past direct tax payment records (through recent linkages between the indirect tax and direct tax information system).
• Extend and universalize e-invoicing system:  to companies with an annual turnover exceeding Rs 100 crore (from 500 crores) and to all B2B companies to address the problem of bogus input invoices.
• Improve cash-to-credit ratio: to 23:77 (from 20:80) for improving the monthly GST collection.
• Build up capacities among tax officers:  state government is required to improve capacities in services taxation which was handled by the Centre in the pre-GST period.
• Streamline the compliance directorate: by distinguishing between prongs of compliance verification system - 
  • Return scrutiny (to ensure the correctness of assessment)
  • Audit (to reconcile the tax return with the financial records) 
  • Intelligence-based investigations.