International best practices in relation to GST compliance- Is India compliant?
M S Mani and Amit Sarker (with technical inputs from Krupa Shah)
In the world of digitized supplies and electronic commerce, one of the fundamental principle that any jurisdiction wishes to adopt is effectiveness and fairness in taxation system thereby acting as a support for businesses. In addition, the potential for tax evasion and avoidance needs to be minimized while keeping counteracting measures proportionate to the risks involved.
In the above context, the framework, administration and compliances under the much awaited Goods and Services Tax (‘GST’) of India, would be expected to achieve a fair balance of ‘minimum government and maximum governance’ to develop as a progressive system of taxation. Let us look at some key aspects of compliances as proposed in the model GST Law in backdrop of requirements prescribed by some nations where GST has already been implemented.
As prescribed by various nations, India too proposes a minimum threshold for obtaining registration for a GST Taxpayer. In the present indirect tax regime, the Central laws prescribe different threshold for goods and services, while the threshold in the State VAT laws vary from state to state. In this backdrop, the proposal for a uniform threshold for goods and services across India (with an exception for certain economically backward states) is a paradigm shift from the present regime.
While the practices for voluntary registration, due date and mode for registration as proposed under Model GST Law are similar to that of many nations, the categories as recognized for GST registration in countries such as Canada and Australia are aligned to business status for income tax/business tax purposes e.g. most businesses, charities & public institutions, public service bodies, non-residents, etc.
A common threshold for all GST Tax payers could be easier to understand, however, it could also induce the requirement of complex web of compliances even for small business and not for profit organizations. In the global context, countries such as, Canada, UK, and Australia provide separate threshold for category of tax payers and nature of business activity as a facilitation measure. A case in point is Australia which prescribes a separate threshold for non- profitable organizations. Further, Canada has also defined separate categories for charitable and non-profit organizations for GST compliance.
In order to simplify the compliance requirements for such organizations, the GST legislation could define different categories of GST tax payers and prescribe simplified compliances for such categories of tax payers.
A unique feature of Indian GST is the proposition of business vertical-wise registration. This added feature may enable the registrants to undertake segment-wise reporting of GST and also understand trends and movements for each segment.
Further, the model law has adopted the feature of compulsory registration in case of non-residents, whereas Canada provides a threshold for such non-residents for obtaining registration.
Tax Payment & Credits:
Tax Payment process proposed under GST envisages a methodology of generating draft challans and filling up necessary details and thereafter executing payment. Upon payment, final challan would be generated containing 14 digit CPIN. Draft challan would be valid for 7/ 30 days once created based on mode of payment. Preparation of draft challan is a unique feature of the proposed payment process for the GST regime when compared to the GST Laws of other nations.
In case of an amount paid in excess in view of error in total, tax payer can claim refund or carry forward such excess to next period. There appear to be mechanisms laid down in country such as UK for adjustment of erroneously paid GST amounts to the tune of certain threshold prescribed in addition to refund mechanism.
An interesting element is the criteria incorporated under current GST regime for credit availment subject to payment of GST by the supplier. This appears to be a deviation as against the practices adopted by nations such as Canada, UK and Australia which do not prescribe such stringent condition for availment of credits to bonafide buyer. It is worthwhile to note that Canadian GST even permits ITC availment on purchases/ expenses which are invoiced on the buyer but not paid.
Similarly, the time limit for availing credit is generally prescribed as 4 years from date of invoice in countries such as Canada and Australia whereas Indian model law restricts the availment up to one year.
If we look at return filing related procedures, it is evident that GST evolved nations such as Canada and Australia provide for slabs to determine periodicity of the return. This is an administrative convenience which was also built in Indian VAT compliance system for States like Maharashtra in India to facilitate simplified compliance. Another interesting feature added by the Canadian system is that of an optional reduction of periodicity for tax payers, i.e. an annual return filer can choose a quarterly or monthly filing upon request to the revenue authorities. I Further, UK VAT has prescribed a fixed quarterly periodicity of return to build a compliance convenient structure for businesses. India, as compared to these nations, has proposed compulsory monthly return filing for all tax payers and in addition also proposes other returns such as for tax deduction at source, input service distributors, etc. This is expected to increase the compliance burden for small and medium scale businesses.
One of the important feature which has been currently missing in the proposed GST model of India is the facility to file a rectified or revised return. Country like Canada, facilitates the tax payer to make a request in this regard through online mode or by way of a letter. UK VAT system enables an amendment in return in certain circumstances such as not exceeding 4 years, not on account of deliberate mistake and below a prescribed threshold. Similarly, Australian GST also permits a rectification within 4 years. While the present indirect tax legislations do provide a facility for revision of returns, continuance of the same facility could enable tax payers to rectify errors creeping in the returns.
The Indian GST Law envisages a year-end compliance through annual GST return. Such a requirement has its roots in the current VAT legislations of India. The concept has been expanded to Service Tax and Excise from the current year. While this could be an added compliance for business, it could also enable a reconciliation upon closure and enable timely validation and rectifications in reporting.
The model GST law has also proposed to follow the current trend in VAT legislations of many of the States such as Maharashtra, Karnataka, etc. in filing a listing of inward and outward supplies (both party-wise and invoice-wise) as a part of return filing procedure. The due for such filings is prescribed in advance after which the final monthly return would be filed. Such feature is again unique to India when compared to countries such as Canada, UK, Australia, and Malaysia. The origin of such practice was the need for matching of buyer and seller supplies to prevent tax evasions. It is observed that restrictions are proposed to be cast in case of non-matched or reconciled supplies in terms of GST Input Tax Credits. While this feature faces its own inherent challenges such as monthly cut-offs, inadvertent misreporting by seller, implications on genuine / bonafide buyers, this could possible plug the revenue leakage for the Government and could encourage businesses for strict adherence to compliances by all supply partners in a supply chain to ensure seamless credit chain.
Indian GST model law provides mechanism to file refund claim in prescribed situations such as export of goods/ services, input tax credit accumulation, finalization of provisional assessment, pre-deposits, wrong payments due to specific errors prescribed. Such refund claims are required to be filed within two years from prescribed dates. On similar lines, rebate provisions are available in Canada whereby instances such as amount paid in excess than liability, amount paid in error on goods/ services procured, goods exported out of Canada, etc. are covered. The timeline of two years is provided for claiming such rebate. Thus, it can be observed that proposed law has adopted certain best practices from GST evolved nations whereby current one year limitation period for refund claims have been liberalized to a longer time frame.
In the context of above discussion it is worthwhile to mention that OECD framework urges its member nations to adopt principles of good tax administration. One of the guiding principle in this regard encourages revenue authorities to ensure that the compliance costs are kept at minimum level and at the same time ensure optimum administration to avoid tax evasion.
While some of the compliance propositions under model GST Law appear to be aligned to international practices, there are significant exceptions to mitigate risks of tax evasion. Further, it also appears that some of the proposed compliances are prescribed with a mindset to minimize non compliances and evasion. The present indirect tax regime which has been in vogue for decades now, has been dependent on manual processes and procedures. However, the proposed GST processes being completely automated the pitfalls of the manual regime can be easily curbed. The Government thus may need to move away from the earlier mindset of designing processes to prevent tax avoidance and adopt international best practices for a modern and automated indirect tax regime which would significantly increase India’s status amongst the nations which have implemented GST.
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