Evasion of Goods and Services Tax and inability to assess the amount of input tax credit claimed by businesses: Kerala’s Finance Minister Thomas Isaac has called these the biggest disappointments as the new indirect tax regime completes one year of implementation.
It’s still not possible to check and verify if the amount of input credit claimed by taxpayers is accurate, Isaac told BloombergQuint. Input credit is received by a manufacturer for paying tax on inputs used to make a product.
“We are collecting tax just on the basis of GSTR-3B which is a summary return of taxes paid. Unless the details of purchases and sales are given, how do we match? GSTR-2 was to be auto-generated from GSTR-1 and if there’s a mismatch, it is to be validated. This system is just non-existent,” Isaac pointed out. “I don’t even have the information to look into the tax returns filed by the taxpayers. I’m waiting for the annual return form to be filed.”
Also, he said, the e-way bill system has not “stabilised” and there are tremendous leakages.
Watch the full interview here:
Here are edited excerpts:
It has been one year since the GST rollout. Do you think it has met all the expectations that the GST Council started with?
GST rollout was smoother than expected. But the experience in the first year was a bit of a disappointment. The expectations were not met. With a very sharp decline in the incidence of tax burden—from up to 40 percent in the pre-GST period—everyone would have expected the prices to decline. But they haven’t. It was expected that revenues would be buoyant, but revenue growth has been very low.
It’s true that there is compensation guaranteed for a 14 percent growth. Some states like Kerala would have expected a much higher range in the tax revenue. For example, our VAT revenue could grow at 30 percent a year back to back. Therefore, we expected it to be much higher. That has not materialised primarily because of big leakages. The system is not in place. We are still in the hunt for decision-making processes.
At every stage, there is very little autonomy or freedom regarding rates and exemptions to be given. I do agree that inter-state trade should have universally same norms. But within the state, if I want to increase the rate for a higher revenue, why I should be prevented? Or for some situation peculiar to a state, if I want to give an exemption to somebody, why should that be prevented. So states should realise what the loss of fiscal autonomy is about? I am not very happy with what has happened.
What was Kerala’s revenue collection pre and post GST, if you set aside the compensation?
From 2006 to 2012, Kerala’s VAT revenue growth was around 20 percent per annum. Since then it decelerated to 10 percent. We thought GST would provide a higher growth rate of 20 percent. Now, the compensation component factors in only 14 percent.
Everybody has predicted that Kerala will benefit the most because it’s a consumer destination state and also has high density of services. We are not able to examine the legitimacy of the input credit claimed, the e-way bill system has also not stabilised and there are tremendous leakages. So, I am more hopeful about the future that revenues can turn buoyant.
In terms of absolute revenue numbers, what have been the figures like?
For Kerala, without compensation it is only 5 percent growth when compared to the previous year. But I know there is unclaimed and undistributed IGST lying there. It’s huge a amount. Rs 50,000 crore is provisionally being distributed from the fund that has an amount to the tune of Rs 2 lakh crore—Rs 25,000 crore to the Centre and Rs 25,000 crore to states in the proportion of the IGST that they are entitled to.
But there’s a huge accumulation of IGST which is in fact a signal that things are not all that right. The tax liabilities in the entire country would come to something like Rs 5 lakh crore, while tax collection is less than Rs 1 lakh crore—meaning that there’s an input credit that’s being claimed as refund to the tune of Rs 4 lakh crore.
Are these settlements happening on an ad-hoc basis or is there a method using which the amount is being distributed between the Centre and states?
IGST is collected when goods are sold, but then the claim to the state will come only when the buyer here claims it and when he sells the commodity. So, there is a gap. That’s how IGST is accumulated. So, in a sense, there will always be some accumulation of IGST.
There will be a time lag before it can be distributed which is understandable. But accumulation of IGST to this scale is something I don’t understand. IGST has been distributed on the basis of actual claims made by traders of the destination state, which is slow and therefore IGST tends to get accumulated. We made some noise about that in the GST Council. Then they gave us some advance that was to be recovered from the next month onward, which was ridiculous.
Is there any proposal or case for rationalising the rates from a four-tiered slab to a two-tier system?
I don’t know which country in the world these proponents of “reducing the rates” are living in . Just think, why do we compare things with the past? What was the situation one year back? How many rates were prevailing in India? From there, we have come to four rates and there are some exemptions. Tremendous simplifications have taken place. Now, there are people who want to remove the 28 percent slab.
You know what are the implications of that? All commodities which now have 28 percent GST earlier attracted 40 percent. Now, they want to reduce it to 18 percent. Is there not something called re-distributing justice here? In a country like India, with the kind of mass poverty, these durables which are consumed by richer people. You think reducing rates is a big radical step? I am against it. Let the system settle down and then see the outcome, and decide in an informed manner what changes should take place. No more knee-jerk reaction for the Centre and states.
What is the thought process of the Council on the invoice-matching concept in the return filing process, and how have the e-way bills fared?
This is the biggest disappointment. No matching can be done. We are collecting taxes based on GSTR-3B, which is a summary statement of collected taxes, net payment to be given to the tax authority. Now, unless the details of purchases, the details of sales are given, how do we match? GSTR-2 should be auto generated and if there is a mismatch that has to be validated at source. This system is just non-existent. In fact, I do not have information even to look into tax returns given by the taxpayers.
I am waiting for this December and I don’t know what is going to be done and how annual returns are going to be done and so on. So, we have no system of matching the returns today. I think the difference between the total tax liability of Rs 5 lakh crore and actual tax payment of less than Rs 1 lakh crore shows the kind and scale of leakage that could be there. The e-way bill system introduced had to be rolled back because systems were not in place and servers did not function.
Finally, three months after it was introduced again, e-way bills are now getting stabilised. But I must have a system by which on a real-time basis, for any vehicle number I know, I can get what is the commodity that is being transferred, a kind of algorithm to have a systematic check on vehicles.