Cut GST compliance burden; here is why GST Council must act fast

The fact that the extended October 10/20/31 deadlines given for filing pertains to the returns for July makes it clear the problems being faced by GST go beyond what could be called teething troubles. To be sure, the fact that the APIs were delayed for a long time and that the GSTN system could not handle the pressure of returns being bunched up around the last filing date have significantly added to the compliance burden, but when the GST Council meets later this week, it will have to do more than just look for short-term fixes like allowing firms to file returns once a quarter instead of once a month. A fix like this will make it appear the compliance burden has come down, but since invoice-matching has to be done, extending the time for filing returns will only delay refunds. Other short-term solutions like those aimed at increasing GSTN’s processing capacity, though, will be welcome.

Given how exporters are facing a severe cash crunch with their refunds not coming back quickly enough, and with the GST Council nixing the idea of allowing them to purchase goods/services without paying a tax, the Council will have to come up with a workable solution. Some thought will also have to be given to making the composition scheme genuinely attractive—right now, it cannot be used by those providing services and, in the case of traders/manufacturers, it cannot be used if any inter-state sales are being made. While big telcos may be able to file over 1,000 returns a year (three per month per state they operate in), the burden for smaller firms is immense. Holding buyers liable for suppliers paying GST—if this is not done, they are not eligible for input tax credits—is a good way to make the system self-policing, but this is adding to the problems of compliance. And, much like the provision which forces companies to pay the tax themselves if they are buying goods/services from unregistered units—and claim input tax credits later—this makes them reluctant to deal with small sellers.

What the Council will really have to debate at length is what to do about detailed invoice-level returns that need to be filed. While invoice-matching is critical to check tax theft, few other GST jurisdictions have this as it makes the system of filing returns very complex. In such systems, the taxman takes random samples to do more detailed invoice-level checks to ensure there is no tax theft. One way to do away with invoice-level returns is to have less number of tax brackets which will automatically lower the chances of tax theft—finance minister Arun Jaitley had talked of lowering the number of tax slabs once tax collections were healthy, but if he doesn’t convince the Council to do it now, the system may collapse; if not, for six months to a year, the need for filing these returns could be suspended. In any case, if the number of tax slabs is not reduced, once GST returns are inspected and the taxman starts raising demands, the courts will be full of cases contesting classification of goods/services. Another option, used in China, is to ensure all taxpayers use the same taxman-provided software to generate invoices—and the moment an invoice is generated, all invoice-level details get uplinked to the taxman; this can be done in large cities to begin with, and its usage staggered for the rest of the country. Either way, the Council needs to do a lot of work to ensure the GST burden is reduced.