The company rankings by the GST Council will help businesses decide on which firms not to deal with to avoid tax compliance hassles

Businesses will soon be able to know which company they should not deal with if tax hassles are to be avoided.

Federal indirect tax body, the goods and services tax (GST) Council is planning to implement from January a ranking of businesses based on their track record of tax payments. This ranking will enable businesses to judge how likely a material or service supplier will default on its tax payment obligations which could result in blockage of tax rebates if these items are sourced from them, an official who attends Council meetings said on condition of anonymity.

The ranking system is being worked out as a solution to complaints from companies that the tax rebates due to them are getting blocked for no fault of theirs because their suppliers who charged tax-inclusive prices have not remitted taxes to the government.

Although tax authorities recognize that it is unfair to deny rebate to a company which has already paid indirect tax to its vendor, they are unable to grant the benefit as it will hurt the exchequer.

Firstly, the tax that ought to have come in from one of the parties to a transaction hasn’t been received and secondly, the other party may claim refund from the government of what has been paid to its vendor. In the previous tax regime, there had also been many instances of fraud where fake invoices from vendors have been used to claim refund.

The Council believes the best way is to encourage businesses to avoid dealing with crooks.

Experts said the ranking system may have a flip side or two. While it will facilitate a company to know the compliance level of its vendors, it is possible that businesses that have not paid certain taxes due to genuine alternative interpretation of law may get a poor score.

“It is unfair to place the responsibility of good behaviour of the supplier on the buyer, who unlike the government, has no enforcement powers other than approaching a court of law,” said R. Muralidharan, senior director, Deloitte India. The ranking system should only capture defaults in payment of taxes that is collected from customers, he said.

The GST compliance rating system, for which an enabling provision has been made in section 149 of the Central GST Act was not implemented at the time of launching the new tax system from 1 July as the cycle of tax return filing is yet to get stabilized.

“Only when the cycle of return filing settles down over the next few months, the authorities will get to know the level of compliance of assesses,” said Bipin Sapra, tax partner at the consulting firm EY.