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GST technical glitches behind input tax credit frauds: CAG report

GST technical glitches behind input tax credit frauds: CAG report

The Comptroller and Auditor General (CAG) of India has found that the goods and services tax (GST) system is prone to input tax credit (ITC) frauds due to complexity in the compliance system.

“The originally envisaged system-validated ITC through ‘invoice matching’ had not been implemented. The complexity of return mechanism and technical glitches had resulted in roll-back of key GST returns, rendering the system prone to ITC frauds,” CAG said in its report submitted in Parliament on Wednesday.

The GST returns system is still a work in progress despite more than three years of roll-out, it said. “In the absence of a stable and simplified return mechanism, one of the main objectives of GST rollout — simplified tax compliance system — is yet to be achieved,” the report said.

CAG recommended fixing a definite time frame for rollout simplified returns forms as frequent deferments are resulting in a delay in its stabilisation and continued uncertainty in the GST ecosystem. During October 2018 to March 2020, CAG examined records relating to 4,736 of 23,106 refunds in 33 Central GST (CGST) commissionerates. It noticed non-adherence to extant provisions in processing refunds in 280 claims (6 per cent) involving an amount of Rs 16.16 crore.

“We observed instances of irregular grant of refund due to non-consideration of minimum balance in electronic credit ledger, irregular sanction of refund of input tax credit availed of on capital goods, etc,” the report said.

GST shortfall

The CGST revenue was short of the Budget Estimates and the Revised Estimates during 2018-19 and 2019-20. The shortfall vis-à-vis Budget Estimates was 22 per cent and 10 per cent for the years, respectively. Also, CGST revenue grew 2.97 per cent in FY20 over FY19. CGST revenue as a percentage of GDP, however, declined from 3.08 per cent in FY19 to 2.95 per in FY20.

The share of GST remained constant at 62 per cent of the direct tax collections during the last two years (FY19 and FY20).

To a query over this, the finance ministry said on the recommendations of the GST Council, rate rationalisations have been implemented from time to time by the government and, therefore, the actual indirect tax collections may vary with regard to the target set for a financial year.

It should be noted that in December 2015, the report on the revenue neutral rate and structure of rates for GST recommended the range of 15-15.5 per cent as the revenue neutral rate. However, the effective weighted average GST rate as of July 2019 was 11.6 per cent.

In addition, the GST Council revised the threshold turnover limits upwards for registration of taxpayers and the composition levy scheme, which affected GST collections, the ministry said.

Source: Business-Standard

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GST trouble: Businesses reporting 20 per cent revenue fall receive notices

GST trouble: Businesses reporting 20 per cent revenue fall receive notices

GST-registered businesses that have reported decline in annual revenue by 20% or more over the previous year have received a flurry of notices over the last few weeks from the tax department, sources in the know told FE. While notices related to mismatch in declaration between GSTR-3B (summary return) and GSTR-1 (outward supplies detail) were common earlier, the department is now comparing firms’ earning under GST with that of erstwhile service and excise regime.

The notices have asked businesses to produce relevant documents and explain the reasons for decline in sales. The department believes that many such cases could point to possible evasion under the new indirect tax regime. Sources said that the government is sitting on a pile of data that wasn’t available to them before GST. This is further aided by integration of information from Customs and direct tax department. The GST IT system is now throwing up many red flags when tax returns under different tax regimes are compared.

However, the spate of notices are also targeting businesses that have genuine reasons for declining revenue which includes a slowing economy. In one instance, a service provider for multinational companies received a notice but its revenue had slacked due to expiry of certain contracts. In another notice seen by FE, the taxpayer was asked to produce input tax credit documents as it had paid a substantial portion of tax liability through accumulated tax credit.

“While genuine businesses are not worried over these notices, it does raise the cost of doing businesses for them,” Rajat Mohan, partner at AMRG & Associates, said. He explained that replying to notice under GST requires professionals and could cost as much as `1 lakh while earlier, the tax laws had been around for some years and most replies followed a set pattern that didn’t require professional intervention.

Although the GST system generates a lot of data to track evasion, the absence of a full-fledged return system means that there are areas prone to exploitation through fake invoices for claiming additional credit and bringing down tax liability. The Comptroller and Auditor General’s (CAG) report tabled in Parliament recently pointed this out. The new return system is likely to come into force only from next year.

Meanwhile, tax department has estimated that evasion worth as much `1.2 lakh crore may have taken place under GST regime. An official said that while the government had detected evasion worth over `12,000 crore since GST came into force two years ago, rule of thumb suggested that such detection were only 10% of the actual evasion taking place. The GST collection for central government in FY19 fell short of target by over `60,000 crore.

This prompted the government to set relatively modest budget estimate for the current fiscal at `11.89 lakh crore. This translates into an average monthly collection of just below `1 lakh crore. In the first four months of FY 20, the collection have kept pace with the required rate.

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Source: Financial-Express.
CAG says GST has failed to live up to its full potential

CAG says GST has failed to live up to its full potential

It has been two years since the government’s much-touted indirect tax regime–the Goods and Services Tax—was rolled out, but the technology-driven tax code has failed to curb evasion as was envisaged, said the Comptroller and Auditor General of India (CAG).

CAG pointed out that matching invoice of buyers and sellers, an anti-evasion measure envisaged in the indirect tax regime, was still not in place.

An online system validated input tax credit (ITC) through “invoice matching” was still not in place, CAG said in a report. Input tax credit is the deduction for tax already paid by businesses.

“One significant area where the full potential of GST (Goods and Services tax) has not been achieved is the roll out of the simplified tax compliance regime,” the CAG said in its report on GST for fiscal 2018-19.

The return filing system that was in place after the rollout in 2017 was complex and technical glitches in the information technology (IT) backbone Goods and Services Tax Network (GSTN) led to the elimination of the invoice matching system that was seen as curbing evasion.

“The complexity of return mechanism and the technical glitches resulted in roll back of invoice-matching, rendering the system prone to ITC frauds. Thus, on the whole, the envisaged GST tax compliance system is non-functional,” the report said.

CAG also said there were deficiencies in the GST system, indicating a “serious lack of coordination between the executive and the developers.”

The GST Council—the highest decision making body of the indirect tax system—has, however, approved a new return filing system, which businesses were able to use on a trial-basis starting July, and which will become mandatory during the second half of 2019-20. The new return filing system was expected to plug loopholes in the return filing system and introduce invoice matching of sales and purchase, curbing evasion in the process.

“The system of payment and settlement of tax that was envisaged for GST was based on one hundred per cent invoice-matching and availment of input tax credit, as well as settlement of IGST on the basis of invoice-matching. Neither is possible as of now, as an invoice-matching system has not kicked-in,” it said.

According to CAG, invoice matching is a “critical requirement”, which will yield benefits.

On the number of returns filed, CAG said while it was expected that compliance would improve as the indirect tax regime stabilizes, there was yet no improvement in the number of GSTR3B (summary return form) returns filed. While 87% taxpayers filed GST3B in April, 2018, this declined to 79% by December, indicating that compliance declined.

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Source: Live-Mint.
GST compliance regime not yet simple, says CAG

GST compliance regime not yet simple, says CAG

The government has failed to put in place a simplified tax compliance regime and non-intrusive e-tax system remains elusive even after two years of the Goods and Services Tax’s (GST) roll-out, according to official auditor, Comptroller and Auditor General of India (CAG).

“The complexity of return mechanism and the technical glitches resulted in roll back of invoice-matching, rendering the system prone to ITC frauds. Thus, on the whole, the envisaged GST tax compliance system is non-functional,” the CAG has said a report tabled in Parliament on Tuesday.

The new indirect tax regime had kicked in July 2017. The transformation tax structure is aimed at reducing tax cascading, ushering in a common market for goods and services and bringing in a simplified, self-regulating and non-intrusive tax compliance regime.

The CAG said that one significant area where the full potential of GST roll out has not been achieved is the roll out of the simplified tax compliance regime.

While it was expected, the auditor said, that compliance would improve as the system would stabilise, all returns being filed showed a declining trend of filing from April 2018 to December 2018.

According to the report, the filing percentage of GSTR-1 returns (monthly returns on outward supplies) were throughout less in comparison to the corresponding filing of GSTR-3B returns (summary self-assessed return). The introduction of GSTR-3B resulted in filing of returns with ITC claims which could not be verified and it appears to have disincentivised filing of even GSTR-1.

“Since filing of GSTR-1 is mandatory, short-filing is an area of concern and needs to be addressed,” the CAG noted.

GSTR-3B being only a summary return, short-filing of GSTR-1 implied that the tax departments did not have complete invoice level details as filed by the suppliers, which could be used to verify details given in GSTR-3B or to arrive at turnover.

During the audit, the CAG found that system validations were not aligned to the provisions of the GST Act and as a result, there were some crucial gaps in the registration module. Among various gaps, the system failed to validate and debar ineligible taxpayers from availing Composition Levy Scheme.

Source: Economic-Times

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Bill gives free hand to CAG to audit GST operation

Bill gives free hand to CAG to audit GST operation

After a series of communication with the Union finance ministry, it has been decided to drop the particular reference on the role of the Comptroller and Auditor General in the Goods and Services Tax (GST) Bill that had restricted the audit parameters of the government’s official auditor.CAG

A top CAG source said the auditor is free to audit the entire GST operation with revenue implication to the government and pick up accounts of any entity for audit purpose as it deems fit. “In the draft Bill the role was restricted, which has been dropped in the final Bill after the auditor raised objections with the finance ministry,” he said.

 The audit of the GST regime will be like any other audit of government department, state or central, and no party can claim exemption.

The Bill tabled in Parliament on Monday states that the accounts relating to GST fund “shall be audited by the CAG at such intervals as may be specified by him”. The accounts of the GST fund will be certified by the CAG and its audit report thereon shall be laid before each House of Parliament, according to the Bill.

The Bill provides that the financial year 2015-16 shall be taken as the base year for the purpose of calculating compensation amount payable to states. The compensation shall be released bi-monthly against the figures given by the central accounting authorities provisionally and final adjustment shall be done after getting audited accounts of the year from the CAG.

 The audit would look into the accounts relating to assessment of input tax credit, nonlevy , short-levy, interest, appeals, offences and penalties in relation to the levy and collection of the cess leviable on the intra-state supply of goods and services. The CAG official said that the auditor’s role has been well defined and has the constitutional backing where the government revenue is concerned.
Source : Times of India
Who’s afraid of CAG watching over GST — and income tax?

Who’s afraid of CAG watching over GST — and income tax?

NDA, which came to power blowing the trumpet of clean governance, appears oddly anxious of the watchdog’s oversight.

GST- CAG

If Parliament doesn’t intervene in the days to come, the Goods and Services tax (GST) may stay out of the purview of the Comptroller and Auditor General (CAG).

The GST Council, aiming for a July rollout, has conveniently avoided CAG’s oversight with respect to the GST’s functioning. CAG enjoys constitutional authority to certify the accounts (revenue expenditure) of the Centre and states.

Despite a special mandate for CAG in the original GST draft bill to audit the review of GST system, the GST Council agreed to delete the said proviso in the final draft.

What explains the sudden detour?

Has the CAG’s activism during the UPA government’s tenure alarmed the current administration or is it a plan to discreetly clip the wings of constitutional institutions?

Section 65 under the preliminary draft of the GST authorized the CAG to seek information and clarifications from GST Council. In October 2016, the move to dilute CAG’s authority in GST affairs slowly kicked off.

CAG had, in fact, written a letter to the government requesting to maintain its power in GST act as per constitutional norms.

Although it is still authorized to verify the formula on which the Center will compensate the states for their losses post GST, the Centre and state are in sync to keep the constitutional auditor at bay in other GST affairs.

If this decision fructifies and gets Parliament’s nod, the constitutional auditor’s role to oversee the central and state governments’ revenue will be extremely limited.

Interestingly, this is not the only bone of contention between the auditor and the budding GST administration. The CAG has been denied permission to audit the GST network (GSTN) as well.

GSTN is a non-government, private limited company. The government of India holds 24.5 per cent equity in GSTN whereas all states of the Indian Union and the Empowered Committee of State Finance Ministers together hold another 24.5 per cent. The balance 51 per cent equity is with non-government financial institutions.

The company has been set up primarily to provide IT infrastructure and services to the central and state governments, taxpayers and other stakeholders for the implementation of the GST.

The central and state governments have invested Rs 4,000 crore in this company. The finance ministry’s expenditure department has expressed doubts over its functioning.

Even then the finance ministry is unwilling to get it audited by CAG.

It is not surprising that the finance minister referred to the Income-Tax Act while announcing the decision to keep the CAG away from the GST. The CAG does not hold any special powers under I-T Act, which has always kept CAG and I-T dept at loggerheads.

In the late ’90s, the government had launched a Voluntary Disclosure of Income Scheme (VDIS), but barred CAG from auditing it.

The auditor had then formally lodged a complaint along with the police against income tax officers to get access to VDIS documents.

A 1997 redux is in the making. The CAG wants to audit the new Income Disclosure Scheme (IDS), but the finance ministry stands against it, citing the limited role of CAG in income tax laws.

Of course, CAG has not revealed or may not have got the chance to reveal any significant information in its audits over the last two years.

However, three occasions in the past stand out: First, when the CAG exposed the government’s claims that giving up LPG cylinders would lead to savings worth Rs 22,000 crore. Second, when the CAG found holes in NDA’s coal block auction. Third, when it questioned the Gujarat government’s investment (2005) in KG basin.

BR Ambedkar had once remarked that the CAG is an institution more important than the Supreme Court. He intended to make it the backbone of federal financial administration, which is why the Constituent Assembly rejected the proposal to make separate CAGs for states.

Fast forward to 2016: even constitutionally-established norms of transparency have begun to scare successive governments. Surprisingly, NDA, which had come to power blowing the trumpet of clean governance, appears oddly anxious of the CAG’s oversight.

Source : https://goo.gl/pncGvb