Tax officials will reportedly start the process of matching returns and invoices under the goods and services tax (GST), after it had been announced that invoice-matching would be deferred till March. Chop and change should be kept to the minimum in policy and administration, to make compliance easy for businesses. Apparently, the government wants to check the veracity of the input tax credit claims due to worries over slowing revenues.
GST allows producers to claim credit for the taxes paid on inputs, and, to the extent credit is used, government revenue dips. Rightly, the GST law mandates matching of the details of inward supply with the corresponding details of outward supply to curb evasion.
The need is to have a non-obtrusive and administratively efficient system of matching returns and invoices. One way would be to mandate large buyers, with a great deal to lose from any false claims that get discovered later, of inputs from small suppliers to deduct GST at source on their purchases. They can claim input tax credit, while depositing the tax collected on their onward sales.
Both the buyer and the supplier will file returns showing the tax incidence and collection, resulting in one set of invoices getting matched. This would ease the pain for small suppliers, and improve the flow of their working capital: they would no longer have to borrow to pay tax. They have to pay tax immediately after they sell their goods but get paid after months. The interest on debt incurred to pay tax hurts these businesses, with little access to formal finance.
The onus to pay tax after deducting the right amount of input tax credit would shift to large buyers, while the small supplier will only have to file returns showing the value of its supply and the tax that the large buyer has deducted.