The input tax credit (ITC) model of GST owed its origin to the premise of ‘matched invoices’. But it has become too problematic.
Integrated Goods and Services Tax (IGST) on all inter-state supplies and import of goods and services is levied on the basis of the returns filed on the GSTN portal. Taxpayers have the option to use input tax credit (ITC) of IGST for payment of central or state GST.
IGST is collected by the Centre and apportioned between the Centre and states, in line with the GST settlement rules.
But the point of worry is that the CAG audit report tabled on July 30 stated that the IGST settlement for 2017-18 became extremely complicated as the inaccuracies in the settlement algorithm got coupled with the non-implementation of certain GST modules. The limitation of the GSTR 3B – a stopgap arrangement which got institutionalised because of the non-functional GST 1-2-3 return cycle – in capturing all the information required for settlement only added to the problem.
In the 25th GST Council meeting in January 2018, it was clarified that a system of return filing with invoice matching should preferably begin from April 1, 2018. The ITC model of GST was conceptualised on the premise of ‘matched invoices’, an idea that did not materialise and this non-functionality created a vicious cycle which engulfed the entire GST project. Fake invoices leading to illegal credits caused chaos. Introduction of e-way bill – a complex exercise – did not plug revenue leakages.
With increasing revenue crunch and a huge unsettled IGST balance of Rs 1.76 lakh crore (2017-18), the CAG report said the Centre devolved to the states Rs 67,998 crore, according to the Finance Commission formula (42 percent share as against 50 percent). This is quite different from the ratio in which funds would have gone to the states otherwise as per the IGST law as ITC cross-utilisation or apportionment therein is based on the concept of ‘place of supply’.
Article 270 (1) of the Constitution (taxes levied and collected by the Union and distributed between the Union and the states) excludes duties levied under Article 269 (A) (i.e. IGST) from the list of taxes and duties to be distributed. This arrangement would have definitely placed Union Territories (particularly Puducherry and New Delhi) at a disadvantage as the Finance Commission formula pertains to the devolution between the Union and the states only. Furthermore, clubbed with the statutory ‘compensation’ that the states are entitled to under GST, it is uncertain as to how much the states would have lost in the process because of this devolution procedure.
Importantly, can the Centre reflect this ‘unsettled IGST’ balance as ‘tax revenue’ in its figures, as on March 31, as was done in 2017-18? Thus, the accounting procedure for devolution (2017-18), not agreed upon by the CAG – but later on approved by the Ministry of Law and implemented by revenue authorities – has been pointed out in the report as ‘unconstitutional’. The GST Council, as a temporary measure, recommended an amendment to the IGST law in August 2018 to facilitate release of unsettled IGST on ad hoc basis every two months to circumvent this problem to enable regular cash flow to the states. However, this provisional settlement will be subject to revision when the entire data is available.
Another unfinished task, the report highlights, is the integration of the ICEGATE (customs import data module) and GSTN as import data was not being utilised for settlement of IGST. Along with this, the settlement modules pertaining to refunds, prosecution and appeals are also work in progress. In spite of the IGST law providing for apportionment of the interest in connection with the tax, the same is not implemented yet.
The CAG report found (July 2017 & July 2018) certain glaring discrepancies in the settlement of IGST, to the tune of Rs 776 crore, because of duplicate entries picked up by the algorithm from wrong category of taxpayers. The audit also found another instance wherein records for the same taxpayer, in the said period, appeared more than once in 6,748 cases leading to inaccurate settlement of Rs 416.07 crore of IGST funds.
The report argues that in spite of GSTN fixing these errors, the audit found more than 1,500 cases of duplication in settlement reports of December 2018. The weakness of the system becomes apparent when the audit realised that one particular taxpayer in Andhra Pradesh had claimed Rs 6.45 lakh crore (79 percent of the total claims) ITC on IGST. Though these errors were subsequently reversed, the vulnerability of the system to ITC frauds remains a serious concern.
The CAG report is a platform for serious introspection. The need of the hour is to start on a clean slate.