CAG Report: An eye-opener for GST

GST is multi stage, comprehensive and destination based tax that will be levied upon every value addition. With the introduction of GST, India has entered into the countries having one Tax system, however, the debate over whether the GST has the positive or the negative impact over the economy of India is still continuing.

Introduction

The Government of India has introduced Good and Services Tax (GST) to provide an economic boost to the nation. It has replaced much indirect tax levied at different levels under the previous framework.  In simple terms, GST is an indirect tax levied on the supply of goods and services. It is a single indirect tax for the entire nation. GST is a multi-stage, comprehensive, and destination-based tax that will be levied upon every value addition. With the introduction of GST, India has entered into the countries having one Tax system, however, the debate over whether the GST has the positive or the negative impact over the economy of India is still continuing. this article talks about CAG

History

In 2000 Empowered committee was established to propose the structure for GST considering the previous experiences of designing state VAT. In 2004 the task force headed by Vijay L. Kelkar opined that the existing tax regime has several lacunas that could be mitigated by the GST. After several years of discussions and planning the GST bill was passed in Lok Sabha and Rajya Sabha in 2017. Finally on 1st July, 2017 the GST came into effect.

GST negates the cascading effect on the goods and services thereby directly impacting the cost of goods and services. The reduction of tax on goods and services lowers their cost thereby providing benefit to the consumers. The framework of GST is technologically driven. The major activities like return filing, application for return, registration and responses to the notice are to be carried through online mode on GST portal. This has fastened the process. It has three components namely, CGST, SGST and IGST. Before the introduction of GST many indirect taxes were levied that included Central Excise Duty, Central Sales Tax, Luxury Tax etc. The rate of tax evasion was also high. People have resorted to various fraudulent activities to evade tax and claim deductions.[1]

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The CAG Report of 2010

The Comptroller and Auditor General of India Report (CAG) in 2010 highlighted the various issues pertaining to tax evasion done by the individuals and revealed shocking details about the manner of operating Value Added Tax (VAT) system by various states.[2]

The study conducted in 23 states revealed that 10 states out of 23 states witnessed the downfall in average revenue growth during past GST regime when compared to pre VAT period. These included major states like Tamil Nadu and Gujarat. The shortfall in revenue was seen despite the increase in tax base. The audit conducted on the performance found major shortcomings in scrutiny of returns and tax audits, automation process, cross verification, incentive schemes and input tax credit mechanisms. The report suggested that about half of the one lakh dealers surveyed in 23 states were found to be evading Tax.

Scrutiny of only 2600 returns in 15 states revealed the tax evasion of Rs 873 crores. Without any proof of documentation, the dealers were claiming exemption up to Rs 1000 crores on the turnover of Rs 25000 crores upon the sale of good that were taxable.

The study found that about 13 manufacturers did not lowered the MRP (Maximum Retail Price) of goods despite sharp reduction in the tax rate. The benefits of Rs 40 crores were illegally obtained by the sellers instead of providing the benefits to the consumers. Some manufacturers who were exempted from tax were collecting taxes from the consumers and denied its payment to state as a result the state suffered huge losses and the consumers also claimed input tax credit over those transactions.

Key Suggestions

In order to curb all these fraudulent activities the CAG suggested, mandatory filing of e-returns in GST and basic data must be provided by the taxpayers to prove the trail of transactions for claiming input tax credit. The CAG suggested that a time period shall be provided for scrutiny of the returns and the period for filing returns by the dealers depending on their turnover shall be fixed to remove burden from the officers and facilitate easy monitoring of the dealers.

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The CAG has pointed out major flaws existing in the tax structure pre-GST regime and suggested the Finance Ministry to give a due consideration to these issues while enacting the GST. Also, the CAG report focused upon the importance of robust Information Technology for effective implementation of GST so that manual intervention during the cross verifications of returns could be done away with for ensuring greater transparency and speedy filing of returns.

Conclusion

The GST was implemented after considering the CAG report of 2010 that revealed shocking lacunas present under the previous tax structure. These lacunas were given due consideration by the Ministry during the enactment of GST and a robust technological framework has been established so that any dealer could not take the undue advantage of the existing tax structure, tax evasion could not be done by the individuals and the benefits provided to consumers in lieu of the return filing are made available to them in a time bound manner.

Also read K.P. Varghese v. The Income Tax Officer, Ernakulam & Anr.


[1] S Dani, A Research Paper on an Impact of Goods and Service Tax (GST) on Indian Economy, 7 Bus. Eco. J.  264 (2016).

[2]CAG, Implementation of Value Added Taxes in India, CAG.Govt.(December 19, 2018, 13:01 PM),

https://cag.gov.in/sites/default/files/publication_files/SRA-value-added-tax.pdf.