The adoption of a goods and services tax (GST) was always an ambitious project in a country like India, given our wide variation in the way business is done at various levels. Its many benefits on paper, be it the consolidation of fragmented taxes into a cohesive whole or the comprehensive shift to a levy on value addition alone, however, have been clouded by numerous problems of compliance on the ground ever since the new tax regime was adopted in mid-2017. One of its aims was to cast the country’s tax net wider, with the value of input credits—refunds of taxes already paid on inputs—acting as a lure for informal businesses to sign up. Some theorists had even expected it to enhance task specialization, as in-house processes of production would no longer offer a tax advantage, and its associated gains of economic efficiency. Unfortunately, GST seems to have got entangled in a web of deceit, with shady dealers trying to rip the exchequer off. Recent crackdowns revealed that they not only evade tax, but also use fake invoices to claim refunds. In response, the GST Council’s law panel has reportedly proposed a stringent mechanism for GST registration that would double down on identity verification and other checks, with the speed of this process dependent on the “trustworthiness" of applicants. To be deemed trustworthy, new registrants may have to rely on their income-tax credentials and other records. Under the panel’s proposals, those who fail the taxman’s trust test would be given conditional registration in 60 days, but only after a visit to their business premises. Tax credits would be okayed only after they file their tax returns. Further, an analytics tool may be deployed to identify “risky" dealers, such as those not filing returns for six months. The idea is to keep fraudsters out.
All this is symptomatic of a broader failure to implement the tax as it was envisaged. Recall that the GST Network, the technology backbone of the new tax regime, got off to such a bad start—with a series of glitches delaying return filing, invoice matching and refunds—that it had to be debugged. An expedient answer to the problem was found in doing away with the need for invoice claims to be matched with actual GST payments by suppliers. Without transactions done along a value chain being reconciled, though, such a system was bound to expose itself to exploitation. And so it has, with racketeers spinning bills out of thin air.
While it is nobody’s case that tax authorities should look the other way, it remains unclear if an identity-focused approach that classifies taxpayers by trust is a good way out of our GST mess. So long as tax officials have discretionary authority, and the panel’s proposals would probably empower them even more, any explicit categorization of that sort would run the risk of abuse and harassment. It is one thing to catch specific cases of fraud, as the tallying of input bills was designed to do, and quite another to label taxpayers and erect new hurdles for enterprises trying to go legit. The very basis of such an exercise could perhaps be challenged in court. Even from a practical point of view, while some rotten elements may be kept out this way, it would be at the cost of enrolling low-end entrepreneurs whose earnings might be volatile and records messy for earnest reasons. If too many fear being labelled dubious, it would go against the goal of formalizing our economy. To tackle the menace of fake invoices, the government needs to get back to GST’s conceptual plan, not go in for an overkill.
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