DIN Validation system: Plugging the GST Tax Drain and Facilitating Business
The the issue that occupied centre stage of taxpayers, in all of the two years in the life of GST in India, has been the GST common portal created for filing tax returns. On 1st July 2017 the Government, through the private company formed by them, called GSTN, launched a portal for all business processes associated with GST laws. They prescribed a basic structure of a reporting system which came with a system that matched assessment details of input invoices at vendors end with the returns of the person who claimed input credit on it. Discrepancies would be reported to the tax assessing officer who would initiate action. This was not an unprecedented procedure because in Central Excise, some twenty-five years back, without the aid of computers, the Range Superintendent was supposed to cross-check the details of inputs taken in RG 23 register with invoices of suppliers.
The large and organized sector was well geared to work the GSTN and some 37 lakhs reports were filed in the system. However, there was great resentment in the rest of the trade and the system was put in abeyance. The GSTN devised a makeshift reporting system without formally scrapping the report formats that had already been launched. The Government blamed the private companies for not being ready with the use of their system. The GST Council has now decided to introduce new formats in which major concessions have been given to registrants who transact with consumers only. However, all businesses with a B2B transaction would need to follow a system based on invoice matching. There is some relaxation of norms for those whose turnover is less than Rs. 5 crores but not in terms of invoice matching. Though the planned date is 1.1.2020 the talk is that it is more likely to start from 1.4.2020.
In the meanwhile, there has been rampant evasion of taxes. Fake invoices compete with genuine ones and evasion has reached epidemic proportions. These cases account for nearly a third of all cases booked by intelligence agencies and considering that other cases have tax disputed liabilities whereas there is no dispute over tax evasion in the detection of fake invoices, it is no exaggeration to say that fake invoice scam is the greatest tax drain on revenue. It is time to think of the right design for the GST system which will help curb evasion and at the same time let common businessmen file documents with ease.
Returns and reporting system built on an invoice matching system
The basic electronic reporting system in GST requires suppliers to file invoice-wise details of outward supplies made by them during the month in a report called GSTR-1. The details of outward supplies so furnished by the supplier in GSTR-1 would be transmitted to the registered recipients of the supply in a reporting format called GSTR-2A. The recipient of the supply, which for him are inputs, was required to make his list of input supplies in a report called GSTR 2 which could be taken from form GSTR-2A and after he adds details of other inward/input supplies not mentioned in that report. Armed with GSTR 1 and 2 a supplier would then prepare a monthly return with the details of sales and purchases during the month along with the amount of GST liability in a report called GSTR-3. Most of GSTR-3 was supposed to be auto-generated from GSTR-1 and GSTR-2 to which the supplier would add details of discharge of liability of tax, interest, penalty, refund claimed and debit entries in electronic cash/credit ledger for payment of taxes collectively for all the invoices issued in the month. Other returns like GSTR 4,5,6,7 and 8 etc. are based on the same principles but are meant for a different class of taxpayers. GSTR 9 is about annual returns made out of GSTR-3s. The annual return is meant to provide the taxpayer with an opportunity to correct past returns and finalise tax payments.
As the returns GSTR 2 2A and 3 were resisted, the GST Council in July 2018 decided to roll out the revised return mechanism by 1 January 2019. The new date for the launch of the new reports is 1st January 2020. The department has uplinked three formats RETs 1, 2 and 3, called Normal return Sugam return and Sahaj Return, which are to be introduced in October intended to tone down complications in filing for small business. Yet the new Sahaj RET 2 and Sugam RET 3 formats come with 70 to 90 pieces of notes and instructions in all. Though the number of reports has been decreased yet such long and complicated instructions are bound to force them to engage competent accountants, a cost most small businessmen avoid. Making three different kinds of formats will put those that use Sahaj and Sugam at a trade disadvantage in doing business with an organized sector of the economy who use normal returns. The real challenge in the Sugam and normal reports is that they are based on invoice matching system. We may again find reluctance among the small trade to accept them.
Invoice matching system and the average taxpayer
Design of a major software is a highly technical subject, but given the extreme difficulty that was faced by trade and government officials in the business processes under the GSTN, a discussion on the question of better alternatives to invoice matching system cannot be pushed away from the public domain. The most critical constraint of a common portal for GST is the sheer volume of the operation; uploading data on the GST system portal by GST registrants.
A year and a half back the Minister of Finance had stated that 1.3 crores persons had registered in GST. 1.5 crores could easily be the number of persons today who come within the requirement of GST registration in India. 90% of registrants account for 10% of revenue but these nearly 1.35 crores are small in size and find economical high-class professional accountants may be difficult to find. In a database made of data created by these large number of assessees, achieving a general data quality, without the assistance of a competent professional accountant, of an acceptable level is an extremely challenging task at the least. The difficulties in working a sophisticated invoice matched GST system is Herculean.
The biggest threat that a small businessman sees in this complex method is that large organized sector companies with their better means would be able to comply with system requirements but the small business would not be able to cope up. Since the filing work involves interacting with input suppliers if there is an invoice mismatch, larger companies may shun buying goods from small companies. Hence it is not just that MSME is being asked to raise expenses on computer filing, they risk losing market too.
Revenue drain through fake invoices
From the time GST has been introduced, the menace of fake invoices has reached an epidemic proportion. The Finance Minister Nirmala Sitharaman in a written reply in the Lok Sabha stated that GST officers have booked 535 cases of fake invoices involving a total fraudulent claim of ₹2,565 crores of input tax credit (ITC) and arrested 40 persons so far in the current financial year 2019-20. In 2018-19, 1,620 cases of fake invoices were registered involving fraudulent ITC claim of ₹11,251 crores under the GST. As many as 154 persons were arrested. If these are the figures of detection then the actual extent of evasion through fake invoices must be an astounding amount. In September raids were made and Rs 470 crores worth of export refund was found fraudulent based on fake invoices. Knowledgeable persons estimate revenue loss at Rs 1 lakh crores per annum. One may wonder if the system would not collapse if corrective systems are not developed fast enough.
The scam of fake invoices has shown that invoices are sold to fraudulent buyers who take ITC against it. The seller of such an invoice does not at any stage make a supply and he does not pay the GST either. He receives payment in cheque and returns 98% of the amount in cash, the other 2% being his income from the fraud. The invoice matching system cannot check this fraud as there is no manner in which it can throw up details of tax received by the Government from the tax payment module.
The method employed in the frauds is getting GST registrations and bank accounts made by producing Aadhar and PAN card of indigent persons with addresses in shanties or those that are non-existent. A transaction between a fraud invoice forger and a GST registrant who needs a credit entry to pay his tax liability would be too easily noticed and therefore they disguise the transaction by creating a chain of fake suppliers who all pretend to make supplies from one to the other all along showing payment of GST through the Input tax credit balance. In this process, fake invoices are generated by a shell company for supply to another shell company and the process is repeated several times. The last link in this fraud chain of shell companies may pay a minuscule amount of GST in cash, because he would be filing a return, before making an invoice to the registrant who buys his invoice. The GST system does not enable the tax officer to examine an invoice and notice the charade of chicanery.
Delays in settlement of IGST to apportion amounts to states
Quite apart from the revenue leakage, the system of settlement of IGST is strained. States are not able to get transfer of amounts, lying in the Consolidated Fund of India, which have been used to pay SGST by recipients of the goods or services. The data in the GSTN system is not dependable to enable easy IGST settlement. The CAG’s report on Goods and Service Tax for the year ended March 2018, (Report number 11 of 2019) mentions that a significant amount of Rs. 8.19 lakh crore of ITC of IGST was claimed by the taxpayers in their returns during 1 July 2017 to 8 August 2018 against total CGST, SGST and IGST of Rs` 11.93 lakh crore collected from 1 July 2017 to 31 July 2018. Out of Rs. 8.19 lakh crore as stated above, taxpayers of Andhra Pradesh alone claimed IGST-ITC for Rs. 6.49 lakh crore which was considered as highly unlikely. This was brought to the notice of GSTN by audit on 21 August 2018. GSTN replied that the taxpayer had reversed the credit as it was wrongly filed by him in GST 3B. The report puts this as an example of how an unrealistic and erroneous claim of ITC of IGST by one taxpayer, representing 79 per cent of total ITC claim by all taxpayers for a month, was allowed by the system, exposing the vulnerability of the system to fraudulent ITC claims.
CAG believes that an invoice matching system would have helped in the settlement. Their view if of course correct but the system can be developed for real time settlement of account between States and the Union by tracking the payment on invoices, the DIN system of GST discussed in the paragraph following.
Design of ‘Document Index Number (DIN) Validation system’
There are two parties in a tax system; the tax administration and the taxpayer. The administrator aims at full tax recovery as mandated by law and taxpayers, in their own better interest, do not want any disruption in their business activity due to shoddy compliance with tax laws and for that reason are averse to breaking laws. A tax system should aim at making a system that suppresses frauds and lets normal businessmen conduct their work with ease.
Tax is money paid by a person to the state and the best method for checking tax receipts is to cross verify the particulars of payments mentioned in documents like the invoice with tax payment record. In the early stages, each clearance from the factory was covered by a gate pass which contained all assessment details as well as bank details of tax payment. This provided the most fool-proof system of accounting for goods but with growth in production, it became impractical both for the department and the taxpayers to cope up with scriptory work. Later, payment of tax on gate passes was done away with as payment ledgers (Personal Ledger Account) were introduced in which cash was paid for several gate-passes together under one challan. From that time onwards entry to indicate tax payment is not recorded on invoices.
In the electronic age, the time has come to reintroduce the old age practice in tax departments in which assessment was made on each invoice (gate pass as it was then called) and tax paid thereon. The old system was given up as it involved the tedious procedure of seeking approvals from an Inspector on each invoice/ gate pass and he would allow only if an assessment was done correctly and tax paid. It was given up to save the industry from harassment. In this age of advanced computing machines, the old limiting factor of an officer’s intervention is no longer relevant as much of processing can be done electronically. To ease the financial difficulty of taxpayers, the GSTN could introduce e-wallet so that ready cash is not required each time an invoice is prepared for making a supply.
In the current GST system a credit of input duty is allowed when an input invoice is accounted in monthly or quarterly return. In the proposed environment, the tax payment module could generate a Document Index Number (DIN) instead of Challan Index Number (CIN) for each invoice or any equivalent document including bill of entry which is made. If the DIN is found genuine in the system, the credit of tax against the invoice can be released immediately. This could be termed a ‘DIN validation system’ and it would have the following benefits:-
input users will face no time lag in taking input credit.
the system provides a minimum guarantee against fraud input suppliers who have paid tax short. It follows that the laws which seek to recover tax from input user for short payments made by the input supplier can be done away with.
the DIN the system will enable revenue to reduce the time of the assessment period. The period of monthly returns and quarterly returns than can be justifiably reduced in duration
the system will enable a very quick settlement of IGST deposits.
Today the small business needs time and support to cope up with the new business environment and falling demand. It is not the right time to try and make the country purists in the matter of data quality. Even in most advanced countries, data quality standards remain much below satisfactory levels. However, no Government can afford to be lax about tax collected as cash. GST Council may consider introducing the DIN validation system. The officers will need to work out other details and features including the need for change in the law to bring this system to life. Every idea takes birth when its time has come; the time for DIN validation system has come.