JUNE 12, 2018

By M G Kodandaram, IRS, (Retd.)

ONE of the significant advantages of the GST regime is that the system has certain inbuilt regulating measures to verify the extent of compliances of law and procedures by the registered taxable person. The legal and technological interface is expected to monitor the level of tax compliance of such persons, without the interference in their businesses by the Tax administrations. One among them, the provision of 'Tax deduction at source' ('TDS' for brevity) by certain categories of recipients, is projected to be an ideal move in that direction.

Objectives of 'TDS'

As normally understood, TDS mechanism is a standard practice employed by the tax authorities world over, to collect taxes in advance from the taxable persons. Under the system, a certain part of taxes due are collected in advance, directly from the source where such person's income is generated. Under the proposed TDS scheme of GST regime, a certain percentage of amount payable to the supplier in respect of goods or services, are deducted by the recipient (Deductor) at the time of making payments to such supplier (Deductee) and deposited with the Government by the deductor on behalf of the supplier. The amounts so deposited travel from the recipient's electronic cash ledger account to the electronic cash ledger of the registered person, who is allowed to use such credit for payment of remaining portion of the taxes by him. In the process, the information furnished by the deductor is verified with the returns filed by the deductee (Supplier), and the truthfulness of every such transaction is established. This is similar to the concept 'pay as you earn' or 'withholding Tax' in direct taxes regime. Such a mechanism, in addition to sharing of the responsibility of tax collection between the deductor and the tax administration, ensures regular advance inflow of cash resources to the Government. It also acts as a powerful tool in preventing tax evasion.

Persons covered under TDS

The GST law (section 51 of CGST Act 2017) provides the necessary legal backing for mandating such a TDS Procedure. At present, TDS procedure has been partially rolled out for implementation, by allowing the persons concerned to register themselves in the GST Network (from 18.09.2017). As per the statutes, the following persons shall deduct tax at source (the deductor) viz., '(a) A department or an establishment of the Central or State Government ;(b) Local authority; (c) Governmental agencies; (d) Such persons or category of persons as may be notified by the Government on the recommendations of the Council'. In this regard CBIC has notified (Notification No. 33/2017 – Central Tax dated 15.09.2017) adding the following category of persons as deductors viz., '(a) an authority or a board or any other body-(i) Set up by an Act of Parliament or a State Legislature; or (ii) Established by any Government, with 50% or more participation by way of equity or control, to carry out any function; (b) Society established by the Central or State Government or a Local Authority under the Societies Registration Act, 1860 (21 of 1860); (c) Public sector undertakings'. From the above list, it is evident that persons notified are governmental users, being bulk consumers. In one word we can name such deductees as 'G-consumers' for ease of reference. The category of persons could be added or altered in future also, as the Act provides for such amendments on recommendations of the GST Council ('Council' for brevity).

Deductor to Register Compulsorily

The listed G-consumers are not eligible for any threshold exemption and have to compulsorily register themselves for TDS purposes, even though they are not registered taxable suppliers of goods and services. (Section 24(vi) of CGST Act, 2017). The G-consumers may apply and seek registration based on PAN or Tax Deduction and Collection Account Number (TAN) issued by the Income Tax Authorities. The process of registration of TDS deductors have been initiated from 18.09.2017 through the GSTN portal. However, the mandate to deduct TDS amount is stated to be made from a notified future date, on subsequent recommendations of the Council.

Amount of deduction prescribed

The amount of advance tax (TDS) to be deducted by the deductor from the amount due to the supplier is at 2% (ie.1% CGST/1% SGST or 2% IGST) of the amount paid to the supplier (Deductee), in respect all transactions wherein the total value of such supply under a contract exceeds Rs.2,50,000/-, excluding the amount of Central tax, State tax, Union Territory tax, Integrated tax and cess indicated in the invoice.

Procedures expected to be in place

The amounts so deducted shall be deposited by the deductor to the respective accounts by 10th of the succeeding month. The prescribed TDS Certificate should be issued by the deductor to the deductee (Form GSTR-7A) within 5 days of crediting the amount to the Government, failing which the deductor would be liable to pay prescribed late fee. (Rs. 100/- per day, from the expiry of the 5th day till the certificate is issued, subject to maximum of Rs. 5000/-). For any delay, the deductor is also liable to pay interest@ 18 % in addition to penalty as prescribed.

The deductor is required to file a monthly return (Form GSTR-7, Rule 66 of CGST Rules, 2017) within 10 days from the end of the month. The details of TDS furnished (FORM GSTR-7) shall be made available to each of the suppliers (Part C of FORM GSTR-2A) electronically through the Common Portal. The TDS so deposited in the Government account, will be reflected in the electronic cash ledger of the supplier (i.e. deductee). The deductor would be able to use the same for payment of tax or any other amount. For this purpose the GST Network is not yet geared up.

It is further important to note that no deduction shall be made in instances where the location of the supplier and the place of supply is in a State or Union territory, which is different from the State, or as the case may be, Union Territory of registration of the recipient. From the above, it is to be concluded that if the recipient is in Karnataka and the location of the supplier and the place of supply are in a State which is different from Karnataka, no deduction of TDS in GST shall be made. Therefore, any supply of goods or services received by a Government in Karnataka in a place outside Karnataka, the supplier being not located in Karnataka, the payments made will not qualify for deduction of TDS under GST. This is because the SGST deducted cannot be allowed as credit in some other state.

The purpose

From the above, it is clear that TDS is just a mechanism to enable the Government to have a trail of entire transaction so as to verify and monitor the compliances of the registered taxable supplier. The procedure prescribed is cumbersome as it involves multitude of 'G-consumers' to be on board for this system to be successful. Also they must be made aware of law, procedure and all related matters so that compliance could be done by them on time, without giving room for penal measures. The under prepared GSTN has to suitably connect all such voluminous transactions to the respective deductee and allow smooth credit flow to the electronic cash ledger of the supplier concerned. The GSTN further have to receive the returns filed by the deductor, verify the trueness of the transactions and report variance, if any, noticed to the respective tax administration. This is similar to the practice in income tax related E-TDS returns filed by deductor and 26AS statement available for viewing the TDS remitted in respect of his transactions by the deductee.

The TDS mechanism covers mainly the supplies made to Government or related to government departments / agencies or undertakings (G-consumers). The persons covered are basically bulk Government purchasers / consumers in the supply chain. Being B2C supply, such consumers by law, are not liable to file any return, like a B2B suppliers. Through the introduction of TDS the authorities are making certain category of bulk B2C recipients to file prescribed returns along with advance taxes deducted, so that the verification is possible on the entire supply chain. This is required mainly to enable the administration for auto-verification of authenticity of supplier's self-assessment declarations viz., periodical returns.

The expected hurdles and disruptions to the trade

The TDS system i.e., the concept, law and procedure, prima-facie appears to be effective, but in reality may pose many hurdles and cause disruptions to the smooth flow of business and trade. The expected impact on this count outweighs the purpose for which it is going to serve as my observations below indicate. This doesn't mean that the administration have to forego such an auto-verification mechanism. There are other alternate and easy methods available to the authorities to carry out similar verification without causing any disruptions or interruptions to the business or trade. In this regard, I would like to flag the following issues to the authorities and all stake holders concerned, for consideration:-

1. The TDS system is generally used for advance tax collection. In indirect tax regime, whether the supplier (deductee) receives payment or otherwise, has to discharge his liability by 20th of subsequent month through filing of a valid return. By resorting to TDS deduction, there is little chance of advance collection of tax to the department as the recipient has to pay consideration to the supplier before such time.

2. All the notified deductors are G-consumers. To the best of my understanding such recipients normally take longer time before making payments to the suppliers. They may make payment to a particular contract, in a staggered way also, depending upon the fund position. Therefore the deducted amount will reach the supplier at a much later date, probably much after filing of a valid return by him. The supplier has to discharge entire tax liability to treat the return as a valid return. The deducted and deposited amount may have to be used for payment of GST by him on subsequent supplies. The deduction so effected is not an advance tax deduction and, therefore, is bad in law.

3. In reality, it may result in excess collection for a particular transaction, that too at a much later date, which is harmful to the trade as well as to the consumer, as it adds to the cost of the transaction. The later adjustments allowed on subsequent Clearances cannot remedy the carrying costs incurred on such transactions and, therefore, not desirable.

4. As there is no assured timely payment on the part of the recipient, the correlation in the system may have to be widely spread out. This may also lead to a grim situation wherein it may travel beyond the time frame fixed for filing of the annual return. This creates a state of ambiguity in finalising accounts / assessments by all concerned stake holders at the frontend and by the tax administrations at the backend. In cases where in the payments are not received, the situation may get further aggravated. The sanction and disposal of refund applications are also going to be affected or delayed on this count.

5. The persons designated to deduct (G-consumers), except Public sector undertakings (PSU) are mainly the ultimate consumers as they may not avail Input tax credit. Owing to this provision, a large numbers of G-consumers (all DDOs across India) have to face the burden of registration and follow the prescribed procedures such as determination and deduction of such sum, depositing the same through e-payment, issue the necessary certificate and filing of returns on time. These activities, which are going to be quite voluminous, need to be governed and monitored strictly.

6. There may be instances of improper or non-compliance by such persons or misuse of such sum by the deductor. Added to this, the inability of the GSTN to support such an activity may cause disruptions to the trade. In this regard the problems faced by the income tax department and the litigation thereon, is an eye opener. By the analysis of the heterogenic nature and volume of transactions, and the working eco-system of G-consumers across the country and preparedness of GSTN at present, it is hard to assume that the proposed TDS will be a successful measure.

7. In GST Law, the general principle is that whenever a Government department provides a taxable supply to a commercial organization, there is a shift in the levy, and the recipient has to discharge GST obligations on behalf the suppliers. (Popularly known as reverse charge mechanism). By having the TDS procedure all the Government departments are forced to register and use GSTN for necessary compliance. This results in overcrowding of the GST Network and should be avoided, unless inevitable. This will cause disruptions in certain sensitive departments viz., defense, police, CRPF, intelligence agencies, DRDO etc. Also as multitude governmental personnel are involved, bringing in a holistic implementation will be a difficult task.

8. The principal purpose of TDS mechanism is to see that amount collected from G- consumers towards GST, reaches the treasury, without any scope for leakage. At present almost all the payments by the G-consumers are through online banking system, directly to the suppliers' account. There is negligible transaction wherein traditional method of payment, i.e., by cash or cheque being used. This type of payments are resorted to only in exceptional circumstances and limited to very small amounts only. In view of the changed circumstances, all the payments are online mode and extraction of necessary data from such sources should suffice the requirements of auto-verification by the authorities.

9. The public sector units (PSUs) are generally registered persons as suppliers and would be filing valid returns as prescribed. The TDS system creates a superfluous task for such persons. When the details of supply are available with the administration, there is no need of having TDS as a mechanism in place for such registered persons. At the most, such PSUs may be asked to insert an additional column, to declare procurements on which Input tax credit have not be availed. But resorting to TDS in respect of such PSUs will burden them as it is a superfluous measure. This will result in an unwanted hurdle to the suppliers also, as they have to first bear the delay in their payments along with excess payment of tax in respect of transactions subjected to TDS procedures.

10. The Government agencies are not equipped properly at all the locations for implementing this mechanism. The proposed system will result in large-scale non-compliance or erroneous compliance by the deductor, which may take considerable time to settle down. The problems created at present viz., the system of export refund and general refund, the non-prescribing of monthly returns are already haunting the business and the trade. If TDS provisions are invoked, it would amount to rubbing the salt on their wounds.

11. The system of purchase and payment in each state are totally based on different footings. In GST regime, we are aiming to bring a uniform solution. As different approaches and yardsticks could be adopted by the deductor, the focused objective of 'ease of doing business' for the suppliers will be totally lost.

12. The return filing mechanism is not yet finalized. Adding the TDS feature will create large-scale disruptions /confusions to all the stakeholders, which is difficult to resolve. It is better to gear up for foolproof return system first so that the faith in the GSTN gets restored.

Alternates available for an effective verification system

The objective of TDS system is to cross verify the declaration of the supplier with that of the recipient. For this purpose there are alternate and simple mechanisms available to G-consumers, which should be gainfully employed. Some of them as illustrations, I desire to provide in the subsequent part.

1. With the objective of curbing corruption and augmenting transparency in the system, the majority of the Present Governmental purchases of consumables, products and services are driven through the Government e-Market (GeM). This has brought the much desired reformation in the procedure and scheme adopted for procurement of goods and services by various G-consumers. The data available in the portal could be gainfully employed by tax authorities for scrutiny and assessment. For this purpose, a half yearly return could be prescribed so that proper and effective verification is possible with no intervention to the businesses of the registered taxpayer. As GeM is managed by Government, such a return will be reliable and trustworthy. Such information could be easily generated by suitable programming of the data available.

2. The Governmental purchases are regularly audited and approved by C&AG officers, both at the states and centre, as they are involved in auditing of the receipts and expenditures of the consolidated fund of states and the centre. Presently all such processes by C&AG are system driven and e-Governed. All the requisite reliable data of the suppliers are available with all such authorities in their servers. A suitable half yearly return could be prescribed to be furnished by such authorities so that there is no need of disrupting the trade. As C&AG being the auditors of the nation, are in a better position to generate such an information return and such a return since system driven, will be more reliable and uniform. As only one functionary of Government will be involved, it is easier to implement and monitor.

3. The Council may think of prescribing an annual information return or half yearly information returns only. The information called for shall be month wise, indicating GSTIN of the supplier and invoice, description of supply, price, tax rates, taxes paid and other relevant particulars for effective scrutiny. As this doesn't involve any deduction of amounts, there is little scope for fraudulent usage of funds. The information may involve every transaction, irrespective of the contracted amount, and the same can be shared with all the tax administrations. This can be used for verifying level of compliance by the registered person.

4. Similar checks and verification could be prescribed by C&AG for themselves too at their end, so that a foolproof system will be in place.

5. As such information relates to reassessment and audit, and preventive work, which are later to filing of returns by the registered persons (Suppliers) a half yearly return will meet this requirement. There is no scope for higher volumes in front end activities of the GSTN also. The information so provided could be auto-verified with the declaration by GSTN also, who can flag any deviations in respect of such transactions. As the e-way bill system guarantees the movement of supplies, this half yearly information return will meet the requirement of proposed purposes under GST.

6. This procedure can be introduced by invoking provisions of section 150 of CGST Act. As per the said provisions, on due recommendations of the Council, the Governments have powers to prescribe procedure for furnishing of prescribed information return by such persons. As per the provisions, such person shall furnish an information return of the same in respect of such periods, within such time, in such form and manner and to such authority or agency as may be prescribed.

Conclusion:

The aim of the Goods and Services tax regime is to evolve it into a good and simple tax system. By adopting this information return by GeM and C & AG, it is possible to get authentic uniform information in the prescribed manner. As the numbers of persons involved are much less, it is easier to implement. By prescribing suitable formats and developing proper auto-verification, this whole process can be governed fully by digital mode. Only deviations reported could be verified and suitable action as prescribed under law could be taken to protect the interests of the revenue. This will not cause any disruption in the business or trade. The honest taxpayers are further motivated as their interests are met.

The purpose of this write-up is to usher an effective tax compliance measure with no further harm to the trade.

(The author is former Assistant Director, NACIN, Bengaluru and Master Trainer, GST. The views expressed are strictly personal.)