Universal invoice matching is absurd

The CAG has said that invoice matching has made the system prone to input tax credit fraud

This subject has now gained prominence in discussions as some analysts have started claiming that the system of GST has become prone to evasion because of not matching all invoices by all taxpayers. This debate has been accentuated after the CAG’s report on GST for 2017-18 tabled in Parliament recently. The CAG has said that “(complete) invoice matching system has not kicked in. ...Invoice matching is a critical requirement that would yield full benefit of this major tax system”. The CAG has said that it has made the system prone to input tax credit fraud. Many analysts have after that joined the CAG bandwagon. Some have said that in its absence, invoice falsification has become a cottage industry. This is absurdly illogical. It is only good English.

 International experience shows that like any tax, VAT is open to fraud and evasion (Michael Keen, VAT Attacks!, IMF Working Paper-WP/07/142, p.15). Input credit and refund give a unique opportunity for fraud in VAT. Many other evasion methods are common with other taxes such as retail sales tax (RST) and turn-over tax. There are, however, certain frauds which are distinctive to VAT. And that is the input credit system. Given that this is true, it is also true that no country in the world does universal invoice matching, not even those in developed countries, which have a highly sophisticated computer system. I have visited several countries to study VAT/GST and have discussed with officers there. It is simply not practical. It is also a waste of time. The reasons are the following: 

 Major taxpayers are not evaders. Tata, Birla, Mahindra & Mahindra, Venu Srinivasan, Hero, Infosys, etc, are not tax evaders. The government has even given tax compliance certificates to many. Many are government undertakings like CLW, SAIL, BHEL, and BEL. Together they pay nearly 80 per cent tax. It is well known that 3.67 per cent of registered taxpayers (which is less than 1,00,000) pay about 79.52 per cent of tax. It is easy to cover them by intensive audit. When an audit can be done, why do invoice matching for them? That will release both machine time and officers for doing invoice matching for suspect companies and medium and small units. The government has already issued an instruction on May 26, 2019, that audit parties should do a comprehensive audit: 40 per cent time will be devoted to big companies and the rest of the time is for medium and small.

 Let us go into some details. The automobile sector has no scope of evasion. Their input and output are fixed. If 1,000 gears are purchased, 1,000 cars or scooters have to be manufactured. The service sector also has all transactions through contracts with the purchasers. They do not sell a piecemeal like soap, or toothpaste. The steel sector is mostly immune from evasion, except for the small secondary sector, which uses scrap. There should be universal matching for them. The instruction referred to above already has enumerated how the risk element has to be identified for which type of industries. 

There is a system of working on the basis of intelligence gathering, which is done by the director-general of Anti-evasion. Practically all the important cases of evasion have been found by anti-evasion directorate like the ITC case which stole the headlines for a long time. CAG report has pointed out that GST Intelligence officials have detected in 2018-19, 1,620 fraud cases involving Rs 11,251 crore. They have detected 90 fictitious companies operating 173 different bank accounts etc. CAG has appreciated that intelligence gathering has to supplement the invoice checking.

Conclusion: GST full database must be made available to the CAG. There is no compromise about it. The CAG should have pointed it out to Parliament about the government denying it to it. However, the fear of evasion is much exaggerated. That is dangerous as it distorts the policy decision. Universal invoice matching is just unnecessary and impractical. Intelligence-based checking, comprehensive auditing and invoice matching together will be far more effective than a ruthless universal invoice matching. Why match all invoices of SAIL, BHEL, Tata, Infosys, Hero etc? It is absurd. The government must stop this. And only match invoices selectively. A muscular solution is illogical. Intelligent solution is needed.

The writer is member, Central Board of Excise & Customs (retired)

Email: smukher2000@yahoo.com