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Massive tax evasion can hit GST rollout
July, 26th 2010

While the government is lobbying hard with Opposition parties to implement Goods and Services Tax (GST) from April next year, a study carried out to assess the current tax base in states and the compliance level could upset its gameplan. The study revealed rampant evasion to the extent of 50% in half of the 23 states where tax audits were carried out.

The study, conducted by the Comptroller and Auditor General (CAG), assumes significance as the finance ministry is yet to fix the threshold turnover limit and come up with a concrete assessee base and estimated revenue collection once the new indirect tax regime is rolled out. The report was submitted to the finance ministry last week.

The report also confirms states' fear that once the indirect tax regime is rolled out, it may lead to fall in their revenue. Of the 23 states studied, it was found that in 10 states, there was a dip in the average growth of revenue during the post-VAT regime against those relating to pre-VAT period. Those included major states like Gujarat and Tamil Nadu. Though the report attributed the loss of revenue despite increase in tax base to tax evasion, these states may raise the issue and seek more time to implement GST.

The CAG investigation found that at least 50% of the one lakh dealers who were taken up for tax audits engaged in tax evasion. An additional demand of Rs 783 crore was raised against these evaders during the test checks in 2009. This amount is without the penalty.

The report called for 100% scrutiny of the returns of dealers and manufacturers to detect evasion. It said low percentage of scrutiny of returns left scope for leakage of revenue.

For instance, it said, tax evasion of Rs 873 crore was detected from scrutiny of only 2,600 returns in 15 states. Dealers were granted tax exemptions of Rs 1,000 crore on a turnover of Rs 25,500 crore from sale of tax paid goods, without any proof of documentation.

In another startling revelation, three states allowed exempted manufacturers to collect tax from the purchaser but also retain the tax without remitting it to the state. The idea was that this will in effect be an exemption to the manufacturers and the VAT chain will also not be broken. It, however, enriched the manufacturers and the purchaser claimed input tax credit (ITC) on tax paid, which was an additional tax outgo for the state governments.

The study found that manufacturers in these three states had thus collected Rs 6,400 crore and did not remit tax in four years, with Reliance group of companies accounting for more than 90% of it.

Besides, two manufacturers in one state were allowed ITC of Rs 8 crore. Since no output tax was paid by the preceding dealers, this amount was paid from the government coffers, the report said.

The report suggested that in future, the percentage of tax audits must be benchmarked to the results of 100% scrutiny of assessments. The extent of evasion flagged by such scrutiny should be the basis for fixing the percentage. The department should also set up a database of dubious dealers on the basis of past history which could form the basis of selection for audit sample. This database should also be made online, the report recommended.

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