By Gyan Pathak
Even after two years of roll out of GST, the tax administration and its mechanism in place is infested with serious faults on several counts resulting in public suffering and economic woes. Multiplicity of tax rates is yet to be completely eliminated. Single IT based interface for taxpayers and simplified tax compliance regime are yet to be fully achieved. System validated Input Tax Credit through “invoice matching” is not in place and nonintrusive e-tax system still remains elusive. No one has a clear picture even about the huge data generated mainly due to its inaccessibility. Even CAG could not access the data required for analysis and assessment.
This is the finding of the latest report of CAG which says that 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 deficiencies in the GST system also point to a serious lack of coordination between the Executive and the developers of the system.
In the beginning, the growth of indirect taxes slowed down to 5.80 per cent in 2017-18 over 2016-17, while this growth rate was 21.33 per cent during 2016-17.During 2017-18, Government of India resorted to devolution of IGST year-end balance to the States as per Finance Commission formula, which was in contravention of the provisions of the Constitution of India and the IGST Act. This also has the impact of distribution of funds to the States on a completely different basis instead of ‘Place of Supply’ concept as envisaged in the IGST Act.
The CAG report says that post implementation of GST, the Centre’s revenue on goods and services (excluding central excise on Petroleum and Tobacco) registered a decline of 10 per cent in 2017-18 as compared to revenue of subsumed taxes in 2016-17. There was a short transfer of 6,466 crore of GST Compensation cess to the Public Account during 2017-18.
All returns being filed showed a declining trend of filing from April 2018 to December 2018. 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. GSTR-3B being only a summary return, short-filing of GSTR-1 implied that the tax departments did not have complete invoice level details.
The system in place was found to have certain provisions that were not even a part of the Act itself. Software Requirement Specification (SRS) is a case in point which included a condition not prescribed in the Act. During inspection, system validations were not found aligned to the provisions of the GST Acts and Rules, leaving the crucial gaps in GST Registration module. The payment module, despite being in operation since 1 July 2017, was fraught with operational deficiencies, like delay in updating the Electronic Cash Ledger (ECL) even after successful payment of tax by the taxpayer; Lack of assurance on minimum service requirements prescribed for banks. Many other issues were found including incorrect display of messages to taxpayers. Facility of payment through Debit / Credit cards could not be made available as Ministry did not decide on how to deal with the financial implications. CAG said that in a system with automated interface between the IT applications of the banks and GST portal, there should be no scope for errors such as invalid GSTIN and expiry of CPIN leading to non-reconciliation of GST receipts.
All the IGST Settlement Ledgers were not being generated due to non-implementation of corresponding GST modules, like imports and appeals. This, coupled with the 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 to the Centre and various States. The incomplete IGST ledgers were partly responsible for Rs. 2,11,688 crore of IGST balance remaining unsettled during 2017-18.
Duplicate records were noticed in 6,748 cases in 5 Settlement ledgers, leading to inaccurate settlement of 416.07 crore IGST funds for the period from July 2017 to July 2018.Incorrect settlement of IGST amounting to Rs. 359.46 crore during the period from July 2017 to July 2018 was noticed because of erroneous entries in settlement ledgers due to the algorithm picking up entries from wrong category of taxpayers. Unrealistic 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. The IGST algorithm was found to be defective picking up entries from wrong reports in IGST module.
The report said that Business Continuity Policy was not finalised and only Disaster Recovery Plan had been in place. Lack of a systemic approach to change management, coupled with some of the deficiencies pointed by this audit remaining unaddressed even after GSTN reported corrective action, indicated the crucial risks existing in the application running on the GST portal.
CAG said that the failure to map business rules correctly and the absence of key validations in the rolled out system points to inadequacies in the functioning of GSTN. There is a need for GSTN to re-examine the system to ensure that critical deficiencies in application be rectified. The role of the executive in UAT / SRS sign off also needs to be re-examined. The problem of accumulation of IGST balance due to unavailable IGST settlement reports should be resolved on priority to minimize the need for resorting to ad hoc apportionment of unsettled IGST, to be adjusted against future apportionments due to the States.
Unhindered and full access to pan-India data is crucial for meaningful audit and to draw required assurances needed, otherwise certifying revenue receipts may become difficult. In absence of access to GST data, even CAG had to make conclusions on compliance audit based on limited audits carried out in the field. IT system is creating numerous problems which are being sorted out manually by offices. The system of payment and settlement of tax that was envisaged for GST was based on one hundred per cent invoice-matching and availability 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.