GST-compliance blues will melt away

GST Council has taken several decisions to ensure easy migration for SMEs to the new system

The goods and services tax (GST) has been rightly hailed as a transformational tax reform. It is likely to have a salutary effect on the economy and also nudge the non-compliant towards compliant tax behaviour. The worry is that in the immediate short term, small and medium businesses will have to acquire habits of documentary discipline and electronic filing of returns.

In the two months preceding the GST enforcement, a number of decisions were taken by the GST Council to make implementation easier for small and medium businesses. First, the turnover limit for the composition schemes, which was earlier between Rs 20 lakh and Rs 50 lakh was raised to Rs 75 lakh. This meant that all small businesses with an annual turnover of less than Rs 20 lakh would be exempt from payment of GST and units with a turnover between Rs 20 lakh and Rs 75 lakh would have to pay a flat rate based on annual turnover. The rates were fixed at one per cent of turnover for traders, two per cent for manufacturers and five per cent for restaurants. Under the composition schemes, taxpayers would be required only to file a simple quarterly return without having to submit the details of invoices. Only turnover details are required to be furnished. On the flip side such units would be ineligible to avail of input duty credit and pass it on. Therefore, only units with an annual turnover above Rs 75 lakh would really have to comply with all the requirements of the GST procedures.

The scare of technology created is also slightly misplaced. For example, today, more than 90 per cent of payment of duty with respect to Customs, central excise and service tax are made electronically. In many states, value-added tax returns are also filed electronically. Filing a return is not difficult for those familiar with the operation of smartphones.

The most important feature of the GST is that every taxpayer has to get a registration number and file a return to the central portal created by the GST Network (GSTN). This implies that every transaction in the GST system would be registered. Out of the expected eight million registrants, seven million are small and medium businesses. To help them file the returns, the GSTN has released an offline utility that can be filled up by small and medium business in an Excel format, much like they do while submitting their income tax returns today. The offline utility avoids the problem of requirement of continuous internet connectivity, which is not available in many parts of the country. Further, the GSTN has also made available an offline software that converts the information in an Excel format to the standardised format required for uploading to the portal. Many of the companies like Tally are also making available software that can filter out errors such as wrong assignment of revenues, duplicate invoice entries and incorrect display of HSN classification codes. This will ensure that error-free returns are submitted by small and medium businesses to the portal.

Illustration: Binay Sinha

There is a lot of disquiet about the large number of returns to be submitted under the GST. One of the publications in a recent piece refers to the filing of 37 returns annually by a taxpayer. This is not true. The assesse only has to submit the details of his outward supplies on the 10th of every month giving details of his outward supply in what is called the GSTR 1 returns. His inward supplies is auto-populated by the system in the GSTR 1 and by the 15th of the month, the taxpayer has to validate the details of the auto-populated inward supplies. The validated inward supplies appear in the GSTR 2; the GSTR 3 is also system generated by the 20th of the month, which gives the computation of the duty liability of the taxpayer. Therefore, only one return submitted by the assesse every month in three parts of which two and a half parts are system-generated. Therefore, in some sense return filing under the GST is more in the nature of interactive dialogue in which suppliers and buyers converse on a common platform. The matching of invoices is again done by the system and will greatly reduce non-compliance. Therefore, all small and medium businesses have to do is to correctly record and furnish all their outward supplies. The invoice details along with the HSN classification codes are to be given only to business-to-business transactions and not to business-to-consumer transactions. 

Further, if one were to look at the information furnished today and under the GST, one would be surprised by the information overload in the pre-GST system. The current central excise, service tax and VAT returns have varying periodicity and seek a host of information imposing compliance burden on the taxpayer. In contrast, monthly returns under GST are much simpler and all the information required for compliance verification is captured in the annual returns. While submitting the annual return it is expected that it is reconciled with the returns submitted to the Income Tax Department in form 3CD. Such a reconciliation will obviate the need for a detailed GST audit. 

The simplicity of the GST compliance system comes out starkly when one compares it with the existing system. By giving a two-month window for full compliance with GST procedures, taxpayers, especially small and medium businesses, will have the opportunity to complete their registration formalities, acquaint themselves with the return submission procedures and correct their errors. The system will settle down as taxpayers learn by doing. 

There is no reason to presume that taxation blues will linger for very long, except for those who are non-compliant and revel in documentary indiscipline.

The author is senior advisor, Tax Policy Group, EY India