JUNE 05, 2017

By Priyojeet Chatterjee, Advocate

AS we move forward enacting a new indirect tax regime/GST, overseeing a paradigm shift, we find compliance being the soul of such change. Under the CGST Act, Section 149 establishes a mechanism for compliance rating. Similar provisions are mutatis mutandis made applicable under Section 20 of IGST Act and Section 21 of UTGST Act. The intention behind establishing a rating mechanism is to change the psychological perception of doing business by making information available in public domain for ‘risk averment' for the next stage supplier or manufacturer.The good part of the concept is that this provides option to choose a supplier who offers not only competitive prices but also has a better compliance rating. This helps in mitigating unwanted risks as the rating will be available in the public domain.

Under the proposed regime, compliance rating will play a very vital role in mitigating risk in terms of re-alignment of Input Tax Credit in circumstances of non-payment of consideration or non-filling of Return by the supplier, as under the new ITC Mechanism, credit is available only on matching of invoices. A manufacturer may not take credit if the supplier has not filed returns or not paid the tax liability to the government kitty. ITC is very crucial for MSME as it eases the load on their working capital. An intelligent rating system may equip manufacturers to procure supplies from high rated supplier in order to avail seamless credit. The relevant portion is extracted below:

2. Reversal of input tax credit in case of non-payment of consideration

(1) A registered person, who has availed of input tax credit on any inward supply of goods or services or both, but fails to pay to the supplier thereof the value of such supply along with the tax payable thereon within the time limit specified in the second proviso to sub-section (2) of section 16, shall furnish the details of such supply, the amount of value not paid and the amount of input tax credit availed of proportionate to such amount not paid to the supplier in FORM GSTR-2 for the month immediately following the period of one hundred and eighty days from the date of issue of invoice.

Benefits at Large

The triggering factor of the compliance rating is that this will be available in public domain and with such information, business decisions are expected to be more prudent. As a taxable person with higher rating may enjoy certain privileges while a lower rating be will more precarious to scrutiny. The rating mechanism will also ensure that a non-compliant person is black listed. The proposed mechanism is similar to ‘Denied Entities List” (Black List) provided under Rule 7 of Foreign Trade (Regulation) Rules, 1993.

The compliance rating will be based on following factors:

-  Regular payment of taxes

-  Timely filling of Returns

-  Matching of transaction of outward and inward supplies

-  Transparent reconciliation.

-  Ease in dealing with GST Department

Black Listing of firms/suppliers will be based on following factors:

-  A person who will default in filling of returns,

-  Continuous short reporting of sales beyond 6 months and

-  Continuous default for 3 months in ITC which has been reversed.

The intention behind such a law is also to enlarge the tax base through mandatory reporting of transactions and ensure that maximum business entities are subscribed under the new regime.

Why such compliance is nightmare for small and marginal entities?

The hullabalo o of GST is such that every manufacturer is engaged in either risk assessment or educating his suppliers on the changes to be made under the proposed regime. A rating mechanism like this may deter spirit of small suppliers/marginal suppliers. Business in India is still by and large operating on cash and expecting a paradigm shift in a very short period is just too much. We must acknowledge that we are uprooting a system which is almost 100 years old and planting a new customized system. On the top of that GST enactment is designed in such a way that registration is optional only for namesake. Provision with regards to supply made from a un-registered person to a registered person is such that onus of discharging the tax liability is on the registered person upfront and then he has to take credit of it, virtually making it difficult for non-registered persons to survive in the industry. A compliance rating like this might also deter the spirit of small and marginal suppliers who are above 20 lac but below 2 crores and not equipped with the desired skills or technology. The available manpower to deal with such compliance is not adequate and black listing is too rigorous. It is apparent that there will be some altercations in the initial period and the acclimatization with such change will take some time. Implementation of the regime will increase the requirement of working capital for small suppliers and to meet such demand particularly those who are supplying to e-commerce firms on cut throat prices will need additional funds from banks or other institutions. This will increase the cost of operations indirectly.

Conclusion

It is now very clear that GST is the future. However, it is imperative to move with caution in such paradigm shift. Rating is an absolutely brilliant idea, if there is adequate infrastructure and manpower. A person/supplier sitting in far distant village cannot be expected to file returns over night and with denial of input credit, the stage supplier will run away. In these circumstances some leeway should be given so that the proposed regime should not be a detriment in doing business instead of bringing ease. It is equally important that small and marginal suppliers/entrepreneurs may be provided with some basic training. The cost of implementing GST is always an added expenditure for them. It would be better if a window period of 6 months is provided for suppliers who have a turnover less than 2 crores in the preceding year.

(The author is a practicing Advocate working with YSR & Associates, Hyderabad and the views expressed are strictly personal.)