How GST will reduce Tax Evasion

It has been 4 months since GST has been introduced in India. Since its introduction on the 1st of July 2017, GST has subsumed various taxes like Service Tax, VAT, and Excise Duty etc. This has not only helped in simplifying the taxation system in India due to removal of multiple taxes but has also removed the cases of double taxation wherein first excise duty was being levied and then VAT was being levied on the same item.

Apart from the above mentioned benefits, another major benefit which will accrue to the Government, which has been less talked about, is the Invoice Matching Concept. This will ensure that there are no revenue leakages and the businesses deposit the rightful tax with the government.

The benefit and methodology of this concept has been explained in this article. However, before we proceed with the benefit of invoice matching, it is important to understand how people were evading taxes in the previous tax regime and how they would not be able to repeat the same in the GST regime.

Tax Evasion during the Previous Tax Regime

In the previous tax regime, let us assume Mr. A has availed services worth Rs. 10 Lakhs from Mr. B. Service Tax @ 15% i.e. Rs. 1.5 Lakhs was required to be paid by Mr. A to Mr. B, post which Mr. B was required to deposit this Rs. 1.5 Lakhs with the Government. As a result, Mr. A was able to take the benefit of Input Tax Credit worth Rs. 1.5 Lakhs.

However, for whatever reason, Mr. B didn’t deposit this amount of Service Tax with the Government – either fully or in part. Let us assume, that in his Service Tax return, he mentions that he has paid Service Tax of Rs. 50,000 to Mr. C and Service Tax of Rs. 50,000 to Mr. D and claims the benefit of input tax credit of such amount paid. The balance Rs. 50,000 was deposited with the Government. In reality however, the amount paid to Mr. C was an actual claim whereas the amount paid to Mr. D was a fake claim.

Since, in the service tax return, the invoice wise detail was not required to be mentioned and only the consolidated details were required to be mentioned – the government in most cases was not able to track this. Moreover, sending a service tax notice to everyone was not possible – notices were being sent only to a small number of people and the rest of the taxpayers were able to avoid depositing service tax with the government. This system was widely prevalent, especially among small businesses who neither used to receive any service tax notice nor were they liable to do a Service Tax audit.

How the Govt has been able to remove such Leakages in GST Regime

Under the GST Regime, details of all invoices are required to be mentioned in the GST Return. One major reason why invoice wise details are required to be mentioned is that by doing so, the government will be able to track, whether proper taxes have been paid and as a result, ensure that the benefit of input tax credit has not been misused.

Continuing with the above example, if the same transaction happens in the GST Regime i.e. if Mr. A avails services worth Rs. 10 Lakhs from Mr. B, GST @ 18% i.e. Rs. 1,80,000 would be liable to be paid to Mr. B. Mr. B would be required to deposit this with the Government.

In the previous regime – Mr. B used to make fake claims and take the benefit of Input Tax Credit for payments made to Mr. C & Mr. D. Moreover, as the service tax return was a consolidated return – it was difficult to track such fake claims. However, in the GST Regime – invoice wise details are required to be mentioned. In the GST Regime, these invoices would be matched with the GST Returns of Mr. C & Mr. D, so as to ensure that these are actual claims and not fake claims.

This has been explained below:
 

In the GST Regime – these transactions would be checked in detail at the GST portal. The GST Return of Mr. B would be matched with the GST Return of Mr. D so as to ensure that the tax has actually been paid. If there are any fake claims – the portal will not pass on the benefit of Input Tax Credit. Thus, till the time Mr. D does not deposit the GST collected from Mr. B – the benefit of Input Tax Credit would not be allowed to Mr. B.

As a result of this – the government’s tax collection would increase massively as the business would not be able to fake claims and evade taxes.

To ensure that the system of invoice matching works perfectly fine – the government has mandated that all invoice-wise details are to be mentioned in the GST Returns. This will certainly increase the compliance burden for the businesses but will help the government ensure that proper taxes are being paid and that there are no revenue leakages.

Tejas Goenka
Executive Director, Tally Solutions