India’s Auditor Pulls Up Government For Not Making GST Compliance Simple


India’s auditor has pulled up the government for failing to implement a “simplified tax compliance regime” with the rollout of goods and services tax.

This is “one significant area where the full potential of GST rollout has not been achieved”, the Comptroller and Auditor General of India said in its first audit report of GST.

The auditor said that even after two years of GST rollout, a system-validated input tax credit through an invoice matching framework, has not been implemented. Invoice matching system is used to match invoices issued by taxpayers, and their returns to check evasion.

The complexity of the return filing mechanism and technical glitches resulted in the rollback of invoice matching, making the system prone to input tax credit frauds, CAG said in its findings. “Without invoice matching and auto generation of refunds, assessments on the whole, the envisaged GST tax compliance system is non-functional.”

Invoice matching is the critical requirement that would yield the full benefits of this major tax reform, the auditor said. It would protect the tax revenues of both the Centre and the states, and lead to proper settlement of integrated goods and service tax, it said.

Lack of Coordination Among Departments

The audit report by CAG said that suspension of key aspects of the system like invoice matching, changes introduced in the GST regime, point to inadequate coordination among Department of Revenue, Central Board of Indirect Taxes and Customs, and GST Network.

It also points out failure to try out the system adequately before the rollout, the auditor said.

Revenue Dipped, Compliance Dropped

The growth of indirect taxes for the central government slowed to 5.8 percent year-on year in financial year 2017-18, with the government’s revenue from goods and services taking a 10 percent dip, the auditor said.

Indirect taxes in 2016-17 grew 21.3 percent over the previous year. “While it was expected that compliance would improve as the system would stabilise, all returns being filed showed a declining trend of filing,” the report said.

The filing percentage of GSTR-1 returns—monthly sales—were less in comparison to the filing of GSTR-3B returns. The introduction of GSTR-3B has resulted in filing of returns with input tax credit claims which could not be verified, the report said.

Collections from integrated GST—levied on inter-state transactions and imports—were devolved based on Finance Commission’s recommendations, which was in contravention of the IGST Act, the CAG said. This, according to the auditor, impacted the distribution of funds to states on a completely different basis instead of “place of supply” concept as envisaged in the IGST Act. The government also did not transfer Rs 6,466 crore of GST compensation cess to the public account during 2017-18, the report said.

The auditor also found that IGST settlement reports—designed to enable sharing of IGST between central government and states and generated based on the algorithm that runs on GST IT system—were not being generated. This, it said, was due to non-implementation of corresponding GST modules, like imports and appeals. Inaccuracies in the settlement algorithm, and limitation of the GSTR-3B return in capturing all the information required for settlement, had a bearing on the settlement of funds between the Centre and the states, the auditor said.

The incomplete IGST ledgers were partly responsible for Rs 2.11 lakh crore of IGST balance remaining unsettled during 2017-18.

The auditor has also pulled GSTN for not taking due care in development and in testing of the system before its rollout.

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