Know about the biggest weapon GST has, which will expand the tax base

Goods and Service Tax, or GST, has been marketed under the slogan “one nation one tax”. GST combines 15+ taxes which were levied on businesses and makes them comply with one standardized act across the country. This has been the main selling point of GST. However, GST has some more features which will also change the way business is done in India.

In a previous article, we had seen how GST would be stronger than demonetisation when it comes to the war on black money. GST is based on an elaborate online filing process, which maintains a digital chain of the goods or services traversing through out the country. Every business buying and selling goods is tracked, and any break in the chain (presumably to sell the goods or services without paying tax), is easily noticeable. The only way one can avoid getting caught would be to create a supply chain which at all levels, does not interact with the GST network. This is a challenging task.

Besides this, there is another feature in GST which will help broaden the tax base, and anecdotal evidence already points to this. Statistical evidence would probably emerge over the coming years. This feature is called “Reverse Charge Mechanism”, commonly known as RCM.

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RCM per se is not a new feature in Indian taxation. It also existed in the service tax regime, but there has been a bit of tinkering, which makes it a potent tool in GST.

The concept is simple: In a normal sale transaction, the seller charges you for the goods as well the tax chargeable on the goods. This is know as forward charge. But in certain specified transaction, the seller may not charge you tax: he may be  an unregistered seller (out of the tax net) or he may a specified class of seller, who has been given this benefit of lower compliance burden. In such cases, Reverse charge or RCM kicks in, where the buyer has to pay tax on behalf of the seller. The buyer of course gets credit of this tax paid, and thus it is not a loss.

In GST, this RCM is mandated on two types of transactions:

a. Purchase from specified classes of dealers, who have been given the benefit of lower compliance.

b. Purchase from each and every dealer, who is not registered under GST.

When a GST registered business deals with such persons, it has to: calculate the tax leviable on such purchase, pay the tax, raise a self invoice (on behalf of the seller), and then claim the input of such tax paid. In short, the GST law penalises a registered business (by increased compliance burden) for dealing with such persons, especially persons who are unregistered in GST.

Thus, registered businesses have only two choices:

1. Make the unregistered supplier get registered, so that he collects tax on forward charge basis, and reduces the burden on the registered purchaser.

Or

2. Comply with the RCM mechanism and pay the tax on behalf of the unregistered supplier.

Either of the above choices, have a direct impact in expanding the tax base. If option 1 is chosen, then by forcing unregistered dealers to register, the tax base gets expanded naturally. As soon as there is a business which was earlier unregistered gets registered, he collects and pays GST, thus increasing the number of assessees.

In the second option, the registered business has to prepare a self invoice, and declare such invoices in its GST Return. Thus, every month, it is intimating to the GST network, the value of its purchases from unregistered dealer. At the end of the year, when the GST officers choose to scrutinise this business, they only have to ask details of such invoices, and they will have a ready database of such unregistered dealers along the value of their sales.

Once the data from various GST Returns is put together, they can get an idea of the total sales of such unregistered persons to various registered businesses, and if this turnover is seen to be crossing the GST threshold limit, the GST officers can easily take penal action against such unregistered people for evasion of tax, again expanding the tax base.

Practically, this provision has already made businesses change a lot of processes. Big registered businesses have made it a point to ensure that as many suppliers as possible are registered. Many have refused to get into business with unregistered people. The choice is pretty clear, either fall in line or be out of business.

The ripple effect of this would be better Income Tax compliance as well. Every GST registration is linked to a PAN, and as soon as some turnover is reported in GST returns, be sure that the data will eventually be mined by the Income Tax Department as well, to calculate if any Income Tax is due.

A wider tax base will not only help in increasing the tax revenue in the country, it will also pave the way for lower tax rates. GST has faced criticism from some quarters for having tax rates in excess of 28% for a few items (although the median rate is 18%). Various government officials have repeatedly hinted at lower tax rates in future, coupled with less number of rates, simplifying GST. This is only possible when a larger part of the population shares the tax burden, instead of further burdening only those honest tax payers, who are currently paying taxes.

While the RCM provision in particular and GST as a whole will have a positive impact on tax base widening and tax collection from evaders, in the short run, the transition from the old ways of doing business to this new cleaner model, will claim some victims. But the organised sector, or the compliant sector have not much to worry since, on a whole, GST will reduce their compliance burden.


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