The move of the Goods and Services Tax Department, Kerala, to adopt second level verification of new GST registrants, as reported by BusinessLine , is an innocuous but significant move to plug tax evasion, says a public finance expert. It becomes all the more appealing given that Kerala happens to be a den for tax evaders, says Jose Sebastian, former Senior Faculty, Gulati Institute of Finance and Taxation (GIFT), Thiruvanathapuram.

Kerala accounted for 4.54 per cent of the taxes collected by all States put together during the 10-year period 1957-58 to 1966-67. Its share marginally increased to 4.64 per cent during 2007-08 to 2016-17. This is despite the fact that it had climbed up from the eighth position in per capita consumer expenditure among major States in 1972-73 to number one in 1999-2000. “Obviously, there is a strong case for plugging loopholes in the tax administration system,” Sebastian told BusinessLine here.

Expectations mostly belied

“There was lot of expectation that with the implementation of GST, tax evasion would come down drastically since it is an IT-based tax system which allows minimum interface between taxpayers and tax administrators,” notes Sebastian. Voluntary tax compliance is the hallmark of GST.

The underlying assumption of any tax system relying on voluntary tax compliance is that the administration is in possession of details relating to the taxable transactions of taxpayers. ‘Comply voluntarily, or else you will be forced to comply with, often with a penalty’ is the dictum of tax administrations relying on voluntary tax compliance.

It was expected that the invoice matching provision of GST legislation would make tax evasion difficult, if not impossible, Sebastian said. Invoice matching entailed submission of several returns and it was this provision that created havoc in the initial months with GST implementation.

Too ambitious a target

Ultimately, the GST Council had to scrap the provision of submitting relevant returns at least for the time being. Invoice matching is an exceedingly demanding requirement, he observed. Not all developed countries could introduce foolproof invoice matching systems.

This being so, in a complex country like India, it is too ambitious a target to achieve in the short run. But, this has admittedly deprived tax administrators a major tool for preventing tax evasion. Unscrupulous taxpayers are now having a field day, being fully aware of this handicap.

There is a pressing need to identify fake and benami registrations, says Sebastian. But efforts to achieve this should not be a disincentive for genuine people to get registered. In fact, it is in the best interest of the tax administrators that as many businessmen as possible are brought within the tax network.

Fake registrations

It should be noted that the tendency to avoid getting registered is the rule and fake or benami registrations are the exceptions. “The effort to uproot the weed should under no circumstance lead to uprooting of the plant itself,” said Sebastian.

Empowering officers with discretionary powers to determine whether a registrant is genuine or benami may open avenues for harassment and corruption. “It is better to lay down objective criteria to identify benami or fake registration. A better way would be to visit those registrants in whose case the department has firm data and evidence to doubt the bona fides of the registrant.”

For this purpose, the department has to develop an information system independent of the details provided by the registrants. It is here that institutions like GIFT can play a constructive role, notes Sebastian. Researchers with years of experience here could be roped in to develop an information system.

Published on June 24, 2020