Almost exactly a year ago, we at OpIndia.com had published an article titled:
The entire GST model will be run with the IT backbone called GST Network (GSTN) which will ensure a high level of compliance. GST will form a virtually unbreakable chain of transactions right from the initial raw material, till the goods are sold to the consumer. In GST, the GSTN will automatically parse through the sales details of corporates, and reflect them in the accounts of the individual purchasers.
The only way to then avoid GST is to formulate a chain in which nobody at any level is maintaining proper record and therefore not filing any data with GSTN. While this is not impossible, it would be very hard to cobble up such a chain in most sectors because very often some or the other component has to come from a highly regulated sector.
Not only was the GSTN expected to tighten revenue losses in indirect taxes, we had envisaged that this system would help plug Income Tax leakages as well:
Further, all GST registrations will be linked to PAN, thus data will be shared between the Income Tax Department and the Indirect Taxes Departments. The beauty of GSTN would be that the IT systems would do most of this matching of sales and purchases, with minimal human interface and effort.
To reiterate, the GSTN allows the IT system to track a transaction from start to finish. For example, let us consider an MNC like Pepsi, which has bottling plants in India. It purchases many raw materials from local vendors, manufactures soft-drinks, and then sells them to local distributors etc. When Pepsi buys raw material, it will enter invoice wise details of its purchases, in the GSTN, indicating the name and GST number of the seller. The seller too will upload these transactions as sales to Pepsi. The seller in turn maybe buying his raw materials from some local vendors. Hence, he too will upload his purchases, and the original seller too will follow suit. This chain will continue till the seller is a small business who does not need to upload such details.
Coming back to Pepsi, it will upload all the sale of bottles to various distributors, identifying them by name and their GST number. The distributors will also report the purchases, and then report further sales to retailers or restaurants, again identifying them.
Thus, an unbreakable chain of data is ready which shows how the source raw material moved up the value chain to Pepsi, and then moved to the end consumer. The chain is strong since even if one party does not upload their sales or purchases, the other side will upload their own data. For example, if the distributor does not want to disclose his purchases from Pepsi, he has no choice, since Pepsi will upload its sales. And since Pepsi has declared that it has sold to the distributor “x” amount of bottles, the distributor also has to show sales for the same “x” amount, thus making it very difficult to under-report sales. This logic extends to most people in the chain.
As per media reports now, the Government is actively looking at exploiting this data-mine:
The government is setting up a mechanism wherein data obtained through GST reporting could be correlated with the income-tax filings……Unlike the earlier tax regime, GST leaves a trail, especially for the business of size, and it becomes hard to underreport income or exaggerate expenses.
This data can not only be used prospectively, but even retrospectively. Example, if a business was routinely reporting sales of Rs 2 crore in pre-GST era, and after GST its sales show an abnormal jump (due to the data tracking system), then its possible that the Tax department may be interest in opening up his past records as well, since there would be a high suspicion that he had evaded taxes in the past.
This could be a double edged sword since it could amount to tax terrorism, and hence the Government must form strict guidelines to ensure officers cannot use their “discretion” recklessly. Having said that, GST can help raise tax revenue even on the Income Tax front, if the above mechanism of Big Data analytics falls in place.