When the GST was launched in July 1, 2017 with the promise to simplify our incredibly complex indirect tax system and unify the country through a single indirect tax, the nation supported the new disruptive tax regime the way it had supported demonetisation, setting aside the creeping doubts that were upsetting many businesses. The GST system was built on the simple premise of automatic matching of the invoices submitted by suppliers and buyers, enabling automatic processing of input tax credits (ITC) and refunds by the Infosys-built GST Network (GSTN) portal, the IT architecture that is the backbone of implementation. The GSTN was supposed to minimise frauds, curtail evasion, end harassment of taxpayers and corruption, and bring in transparency, leading to an increase in revenues, which would enable the government to lower rates and converge slabs, finally culminating in a single rate, one nation-one tax system, making it truly a “good and simple tax”.
Two years down the line, most of the promises, however, still remain only on paper. The GSTN has turned out to be miserably inadequate to fulfil its role due to the inefficiencies of the software. The automatic matching of invoices was junked only after a few months, when the returns for outward supplies (GSTR-1) and inward supplies (GSTR-2) could not be matched by the GSTN, and hence the refund of the ITC could not be processed, blocking scarce capital for millions of taxpayers. For easier transition to the new regime, a simple return — the GSTR 3B — was introduced only as a temporary measure while the GSTR-2 was suspended, so that the ITC refund could be made by using only the GSTR-1 and GSTR-3B.
The 3B return, however, has no validation whatsoever in the system, making it open to frauds and evasion that the automatic and complete matching between the GSTR-1 and GSTR-2 was supposed to have eliminated. In fact, the CAG, citing numerous instances of false ITC claims in his Report No, 11 of 2019 has said as much, emphasising that the rollback of invoice matching without any safeguards had rendered it prone to frauds. The self-correcting mechanism of complete invoice matching is a critical requirement of the system, in the absence of which the ITC is claimed by the taxpayer purely on a self-assessment basis without any system validation.
Curbing tax evasion
There have even been efforts to rationalise the incompetence of the system and institutionalise its inefficiencies. A former member of the Central Board of Indirect Taxes & Customs (CBIC) has argued that no country in the world has a complete invoice-matching system which is impractical. It is further asserted that major taxpayers such as public enterprises and private players like the Tata group, the Birla group, Mahindra & Mahindra, Hero, Infosys etc, who together pay 80 per cent of the GST, are not tax-evaders; hence, instead of wasting system resources on universal invoice matching, an intensive audit of their accounts equally serves the purpose.
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Besides, it is claimed that in sectors like automobiles, steel or services, there is no scope for evasion since components and final products, or contracts and purchases, match perfectly. It is only in the sectors that sell products piecemeal, like soaps or toothpastes, that universal matching should be made mandatory; for all others, an intelligence-based checking, along with comprehensive auditing, should be far more effective than universal invoice matching. The alleged large-scale falsification of invoices has been dismissed as “absurdly illogical” and “only good English”.
Fake invoices
The arguments are as vicious as they are absurd. If universal invoice matching was impractical in the first place, why was the system designed upon this very premise? The argument that big players are all virtuous and small players are all evaders is dangerous to say the least — it is an inevitable step towards lobbying and patronage distribution, unfettered discretion, harassment and extortion — in fact, it is an insane prescription to institutionalise corruption and perpetuate very aberrations the GST regime was designed to thwart. There is also complete ignorance of the huge frauds and evasion resulting from fake invoices, which tax officials are struggling hard to curb.
In fact, the Minister of State for Finance has himself stated in Parliament that frauds amounting to ₹45,683 crore were unearthed since the launch of the GST. The CBIC Member (Investigation) had admitted that between April 2018 and February 2019, evasion of ₹20,000 crore was detected, of which ₹10,000 crore were recovered. A thriving ecosystem of fake companies using fake invoices has grown luxuriantly for claiming ITC; no sooner are the refunds claimed that these companies disappear into the thin air.
Only last week, ₹470 crore of evasion and fake invoices of ₹3,500 crore were uncovered by the tax authorities. There is something much more serious than “good English” at stake here, and the focus should be on addressing these serious structural deficiencies.
The writer is former Director General, Office of the CAG of India