Loose ends across the Value-added Tax (VAT) system had led to tax evasion in states and such deficiencies should be avoided while introducing the Goods and Services Tax (GST), said a recently-released study by the Comptroller and Auditor General of India (CAG).
The performance audit, conducted in 23 states for the post-VAT period between April 2005 and March 2009, found shortcomings in the automation process, scrutiny of returns and tax audits, input tax credit mechanism, cross verification, incentive schemes and monitoring post implementation.
The report recommended a road map for the resolution of issues from the legacy system be drawn up before switching to GST. Low percentage of scrutiny of returns left enough scope for leakage of revenue in the VAT system, with one in every two dealers trying to evade tax across the states. Even though the VAT system allowed input tax credit on the basis of documentation of tax invoice, states allowed it without checks.
CAG suggested e-filing of returns be made mandatory in GST and taxpayers must provide basic data for scrutiny to establish the trail of transactions leading to input tax credit. Timeframe for scrutiny of tax returns should also be specified, and the periodicity of filing the returns must be fixed in line with the turnover of the dealer to reduce burden on tax officers and ease monitoring on dealers, it said.
“Further appropriate measures need to be taken for building capacity of the staff, standardisation of the department manuals and minimising the discretion in penalty clauses,” the report said.
As there was no mechanism at the Central government level to oversee the progress on VAT in states, some manufacturers did not reduce the maximum retail price of goods despite sharp decline in the rate of tax and illegally retained a benefit of Rs 40 crore instead of passing it on to the customers.
The study found tax evasion of Rs 873 crore from 2,614 returns in 15 states. Besides, seven dealers in a state were granted tax exemption of Rs 1,026 crore on turnover of Rs 25,650 crore from sale of tax-paid goods, without any documentation. An inadmissible input tax credit of Rs 829 crore in 53,170 cases was allowed in 16 states. The audit also revealed 201 cases of submission of fake or invalid declaration forms, leading to tax evasion of over Rs 16 crore in four states.
