Why compliance is low in GST

It’s more than four months since the Goods and Services Tax was introduced, and while consumers have learned to live with this, businesses are still struggling to adapt. The Government has been on its feet, tweaking rules periodically in an attempt to assuage sentiments.

The GST Council that meets today is again expected to announce a slew of changes to the new tax regime. One aspect that could figure in the deliberations is the lower number of GST returns being filed when compared to the number of taxpayers registered on the GSTN. This issue is, however, expected to be addressed over the coming months.

The mismatch could be partly due to the low level of computer literacy in the country, poor internet connectivity, glitches in the GSTN and the complex return filing mechanism.

But the Government also needs to take a closer look at the denominator (number of eligible taxpayers registered with GSTN). Many of the registered taxpayers could be below the threshold limit for GST and hence not required to file returns. As these businesses de-register from GSTN, the gap can reduce.

Also, lack of awareness about the need to file return in every State or to file nil returns could also account for the lower compliance rate. These issues can be addressed with better outreach.

The CBEC has reported that only 64 per cent of eligible taxpayers filed the summary return, GSTR-3B, for July. This number fell further to 55 per cent for August GSTR 3B returns. The number of GSTR 3B filed for July, August and September were 42.91 37.63 and 38.38 lakh respectively. Even after accounting for composition dealers and those who have not completed the registration formalities, the gap appears large.

Figures for the number of taxpayers who have filed the GSTR-1 and 2 for July are not available, but the press release of CBEC indicates that around 30 lakh taxpayers could be filing GSTR 2 returns for July.

These numbers appear quite inadequate when compared to the number of registrations on the GSTN. According to CBEC, total GST registrations as on August 29, 2017 were 72.33 of whom 13.8 lakh were yet to complete procedural formalities. Almost 19 lakh new taxpayers are reported to have registered with the GSTN by August.

While the registration number is impressive, a closer look at the manner in which this was achieved will also help explain the lower compliance statistics currently being seen.

The revenue department was under immense pressure to roll out GST in the early part of 2017 and to do that it had to focus on two aspects — one, getting the technology platform for GST ready and two, ensuring that there were enough taxpayers ready to start filing returns under the new system.

The easiest way to ensure that there were enough taxpayers was to migrate the existing taxpayers registered for sales tax, VAT, excise duty and service tax to GST. So all of them were given a provisional GST number and migrated to the GSTN.

There were about 65 lakh VAT dealers or traders, 26 lakh service taxpayers and 5 lakh excise duty assesses in the earlier regime, before July. It is possible that some taxpayers were registered for both VAT and service tax or excise duty. If overlaps are removed, the number of indirect tax assessees before July could be around 75 lakh. The revenue has claimed that migration of the older taxpayers was almost 100 per cent completed by July.

But in the haste to migrate the taxpayers, many businesses below the ₹20 lakh threshold for GST have also been migrated from earlier tax regime to the GSTN. The threshold limit for VAT dealers was ₹5 –10 lakh and it was ₹10 lakh for service providers.

Recently, a provision has been made allowing these taxpayers below the threshold to de-register themselves. Since VAT and sales taxpayers accounted for around two-third of the indirect taxpayers under the old regime, it is highly likely that the registrations on the GSTN will come down in the following months, reducing the gap to some extent.

There could be other reasons why GST returns are not being filed. But these can be addressed by increasing the outreach programme and educating taxpayers. Under GST, a taxpayer has to file GST returns even if he does not make any supplies in a month. Many taxpayers could be ignorant of this rule, thus not filing returns. Some taxpayers with operations in multiple States might not have filed returns in States where there was no business conducted.

Businesses that were paying service tax under the earlier regime are finding it especially difficult to cope with the new system where they have to register in each State they operate in and file monthly returns for every State. This is a significant jump from earlier system where one centralised return was filed once in six months.

Also, the GSTN does not allow simultaneous filing of GSTR 1 and 2. So those who wish to file GSTR 1 for July have to wait till the window for GSTR 2 is closed, as both the returns cannot be filed simultaneously. This could also have led to fewer returns being filed.

The tax collections between July and September, of ₹2,75,102 crore, is not bad, implying that the larger taxpayers, accounting for a bulk of the collections, are already compliant.

That said, the issues faced by smaller taxpayers in meeting the increased compliance burden cannot be ignored. The revenue department needs to increase the staff employed to answer queries of taxpayers and to address their issues. Once a cycle of GSTR-1, 2 and 3 returns are filed, things can ease for most taxpayers.

Outreach needs to be strengthened so that the new taxpayers below the threshold limit who have voluntarily signed up for GST, do not de-register due to the complexity of the process or system glitches. Registrations should be allowed in windows of a month every year, in the first five years of GST, to help expand the tax base gradually.