GST compliance may rise, November sees 73% taxpayers filing returns

Only 71.25 per cent of companies registered under the goods and services tax (GST) filed monthly returns for November 2018, while the number was 80 per cent for July 2018, 87.4 per cent for January 2018, and 92.6 per cent for August 2017, showing a decline in compliance over months. 

This is according to the data presented by the finance ministry in Parliament.

Here compliance has been defined as the GSTR-3B (summary input output) returns for a month filed as a percentage of eligible GST taxpayers.  

Better and comparable data across months, however, shows that immediate monthly compliance under the GST is improving marginally with a lag after the rate cuts in July 2018. Here, compliance is defined in two ways: “returns filed by due date” and “returns filed in subsequent month” as a percentage of eligible taxpayers. 

The official data on “returns filed by due date” shows compliance did improve in the first few months of GST implementation, only to reduce in 2018-19. It is on the rise in recent months. As for the latter, compliance for November has been the best ever under the GST, with 73.6 per cent of eligible taxpayers filing returns in December. 

Yet, this does not mean that the GST system as a whole is improving because it is not clear whether the smaller taxpayers have started filing returns faster or the big fish in the GST net have started to give in sooner than before. Further, the increasing immediate compliance is not translating into improved tax collection, and, on the contrary, revenue shortfall under the GST is aggravating. It suggests most of the increased returns could possibly be zero-tax, or low-value returns.

Moreover, people in the know said compliance might reduce because the registration threshold had now been increased to Rs 40 lakh, and more companies were now eligible to opt for the composition scheme. The current analysis does not include composition dealers’ compliance. 

For any month, returns can be filed with an unlimited delay as of now, without penalty but with interest. For example, monthly GSTR-3B returns for July 2017 were being filed even as late as in December 2018, and can be filed till March 2019.

Due to this, the indicator called “returns filed to date” observed at the end of December has a flaw; in that, compliance for July 2017 includes returns filed for the month over 17 months from August 2017 to December 2018, while that for November 2018 includes those filed only over one month — December 2018 — since return filing itself started on December 1, 2018, and returns filed till the end of December are being considered.

This makes monthly compliance estimated from this data incomparable and incorrect to some extent, two officials in the GST system told Business Standard. However, they also said that this data should not be fully ignored. 

What can rather be compared are the returns for all months filed by the due date, which makes the period for all months nearly the same, because the due date for all months falls on the 20th of the following month, barring a few exceptions when the due date was extended by 4-5 days. 

Things become clear when the indicator “returns filed to date” is juxtaposed with “returns filed by due date” (see chart 1). While the former shows an apparent gradual decline in compliance, the latter shows that compliance initially rose only to reduce later. It then improved in July 2018, partly since the deadline was extended from August 20 to August 24. 

Another comparison corroborates that “returns filed by due date” is a better indicator. Chart 2 juxtaposes “returns filed to date” for two different points in time: End of September 2018 and end of December 2018. 

This shows that for all months, compliance improves if we look at a later date, proving that returns for all previous months are being filed even now. The data changes over time, and thus cannot be construed as a final indicator that represents compliance. The indicator “returns filed by due date”, on the other hand, doesn’t change, in addition to the fact that it covers a similar period for all months. 

A third indicator, the returns filed till the end of the subsequent month, calculated from the press releases issued by the finance ministry, further substantiates that immediate compliance is marginally improving. For example, the GSTR-3B returns for March 2018 filed in the entire month of April 2018 are considered (See chart 3). 

This comparable data shows a marked improvement in the recent months, after a stable compliance rate of about 70 per cent for all months of financial year 2018-19. It has improved to 73.6 per cent for November 2018 (returns filed in December), the best monthly compliance achieved under GST yet. 

Experts however think that representing compliance in this was could be misleading to an extent that companies who are the newest additions to the GST net might start filing returns later. They said that there could be multiple reasons for late filing of returns, such as unavailability of money, disagreement on the amount of tax to be paid, or a possibility of rate cut in the future. 

It could also represent voluntary compliance of a particular nature—registration even in case of no tax incidence—getting better since the demand for GST-registered smaller companies is getting sharper. 

This improvement in immediate compliance under GST, however, might not be of any benefit to North Block at the moment, as the tax collection seems inert to the marginally increasing compliance. Finance minister Arun Jaitley said in a blog last week that the shortfall in GST collections due to “rate cuts” would touch Rs 1 trillion.