JULY 31, 2019

By Vijay Kumar

IT is now made clear by the Government's watchdog - the Comptroller and Auditor General of India - all our fears on GST were true - they were rather understated. The situation is frightening. In its Report No. 11/2019 on GST tabled in Parliament yesterday, the CAG pointed out glaring fundamental flaws in the GST System. This was no State Secret, we all knew it, but now that it has come from the Government's own Supreme Audit Institution (SAI), the CAG, it is hoped the Government would instead of throwing away the CAG Report do something serious to set things right.

An inquisitive CAG is not exactly a welcome guest in government offices. Even in this mission of finding as to what is wrong or right with GST, the CAG had to surmount the mighty powers that be, the CBIC and GSTN to get information. The CAG laconically observed,

Unhindered and full access to pan-India data is crucial for meaningful audit and to draw required assurances needed, otherwise certifying revenue receipts may become difficult. DoR's offer of providing data based on CAG's queries is not workable, as without the full data, it is neither possible to formulate queries, nor run the required algorithms on the data. The CAG sought data through the Application Programme Interface (APIs) already designed by GSTN. It need hardly be stated that providing such data as CAG may require is a constitutional and legal requirement.

In the absence of access to GST data, the conclusions on compliance audit were based on limited audits carried out in the field. However, the gamut of issues brought out even in this limited audit point to serious systemic deficiencies that need to be addressed by the department.

The CAG started with a cautious note:

That there would be teething problems in such a major transition is also not unexpected. The issues that remain, and that have been pointed out in the report, should not therefore be seen by the stakeholders as a fault-finding exercise. The gaps/shortcomings have been pointed out in the spirit of constructive suggestions to realise the full potential of this major reform. Issues raised in the report are consistent with the spirit of the reform itself :

1. to relieve the consumer from the burden of cascading taxes;

2. to make the system as fool-proof as possible;

3. to provide the taxpayers an IT-based system that would ease compliance burden,

4. to add to the ease of doing business; and

5. in this context, to reduce the tax official-assessee interface to the very minimal.

This is perhaps the first time, the CAG cautioned that his report is not a fault-finding exercise, though that is precisely the way the government departments would treat his report. Anyway, the CAG need not be shy of finding faults; it is his duty. As per Section 16 of the Comptroller and Auditor-General's (Duties, Powers and Conditions of Service) Act, 1971. (Also Known As the DPC Act),

It shall be the duty of the Comptroller and Auditor-General to audit all receipts which are payable into the Consolidated Fund of India and of each State and of each Union territory having a Legislative Assembly and to satisfy himself that the rules and procedures in that behalf are designed to secure an effective check on the assessment, collection and proper allocation of revenue and are being duly observed and to make for this purpose such examination of the accounts as he thinks fit and report thereon.

Coming back to the present Audit Report, when CAG asked CBIC for a reply to its queries, the CBIC wanted CAG to get the information from Department of Revenue (DoR). The CAG was not amused. Anguish, more than anger, was visible in his observation:

CBIC's reply to the IT audit findings was that the issues raised pertained to GSTN and a reply should be sought from DoR. The fact remained that CBIC, as a stakeholder of GST IT system, has a key role to play in proper design and development of system by GSTN as well as in strengthening the system by ensuring removal of deficiencies pointed out by audit. CBIC, being a part of DoR, asking audit to seek a reply from DoR also points towards lack of coordination between DoR and CBIC with reference to functioning of GSTN.

Audit found (May to October 2018) that certain basic validations were absent in the GST Registration module, most of which has been in use since the beginning of GST. The timelines initially indicated by GSTN in January 2019 to fix these validations were extended further in their reply sent through DoR in June 2019. This shows that fixing these deficiencies was neither prioritised by GSTN nor insisted by DoR, which has merely forwarded the reply of GSTN containing extension of timelines for fixing these deficiencies.

HEIGHT OF VULNERABILITY - INPUT TAX CREDIT OF 6.45 LAKH CRORES BY ONE TAXPAYER

The CAG report contains an interesting case where one taxpayer could claim over 6 lakh crores as Input Credit :

WHAT HAPPENED TO INVOICE MATCHING?

The CAG observed :

The system of payment and settlement of tax that was envisaged for GST was based on one hundred per cent invoice-matching and availment of input tax credit, as well as settlement of IGST on the basis of invoice-matching. Neither is possible as of now, as an invoice-matching system has not kicked-in. Invoice-matching is the critical requirement that would yield the full benefits of this major tax reform. It would protect the tax revenues of both the Centre and the States, it would lead to proper settlement of IGST and would minimise, if not eliminate, the tax official-assessee interface. In fact, even "assessment" in the sense understood in the manual system may no longer be necessary (returns themselves can be generated by a system that matches invoices); and cases of evasion etc., can be traced by applying analytical tools and AI to the massive data that crores of invoices generate.

The self-correcting system, as originally envisaged, was not in place and this led to continuation of avoidable assessee-tax officer physical interface instead of IT based interface. This goes against the objective of reducing the avoidable physical interface to minimum, if not eliminated completely.

START WITH REGISTRATION

The CAG observed,

Registration being the first step in tax administration and given the IT intensive system that GST was designed to be, Ministry should have ensured that a fool-proof Registration module was in place. The IT audit of Registration module revealed that the System did not provide for basic validations prescribed in the Act and Rules for Composition levy and that mandatory fields prescribed for categories like OIDAR and ONPs were not made compulsory in the System. GSTN cited constraints to deliver critical applications on priority or the functionality being a backlog item as reasons for non-implementation of certain validations or features.

DISRUPTION IN GST SYSTEM?

GST itself was disruptive, but what will happen if the IT in GST falters: The CAG says,

Any kind of disruption in functioning of GST IT System even of temporary nature would severely impact the indirect tax administration and cause inconvenience to all the stakeholders. Business Continuity Policy still being work-in progress and a long disaster recovery time against a 30-minute targeted recovery time, as reflected in the mock drills, pointed towards the risks to the system in case of any disruption. Lack of a systemic approach to change management indicated the crucial risks existing in the application running on the GST portal.

While acknowledging that GST is a complete new system being developed, the fact remains that in view of its magnitude and Pan-India impact, it is all the more necessary that due care is taken both in development and in testing of the system before roll out. The failure to map business rules correctly and the absence of key validations in the rolled out system points to inadequacies in the functioning of GSTN. The issues brought out in IT audit also pointed towards the need for GSTN to re-examine prioritisation of development of various functionalities, strengthen their root cause analysis and testing process to ensure that critical deficiencies in application are detected and rectified before rollout to public. The need to involve executive in UAT/SRS sign off also needs to be re-examined.

REVENUE GOES SOUTH

The CAG found that:

- The growth of indirect taxes slowed down to 5.80 per cent in 2017-18 over 2016-17, while this growth rate was 21.33 per cent during 2016-17.

- Post implementation of GST, the Centre's revenue on goods and services (excluding Central Excise on Petroleum and Tobacco) registered a decline of 10 per cent in 2017-18 as compared to revenue of subsumed taxes in 2016-17.

- There was a short transfer of Rs. 6,466 crore of GST Compensation Cess to the Public Account during 2017-18.

NON-FUNCTIONAL TAX COMPLIANCE SYSTEM

The CAG further noted:

- The complexity of return mechanism and the technical glitches resulted in roll back of invoice-matching, rendering the system prone to ITC frauds. Thus, on the whole, the envisaged GST tax compliance system is non-functional. The deficiencies in the GST system also point to a serious lack of coordination between the Executive and the developers.

- System failed to validate and debar ineligible taxpayers from availing Composition Levy Scheme.

- Mandatory fields were found made optional or accepting junk values.

- TDS registrations were allowed under invalid category.

- Lack of validation of key fields in Registration (Legal Name, Type of Business and CIN) with CBDT and MCA Databases.

- Delay in updating the Electronic Cash Ledger (ECL) even after successful payment of tax by the taxpayer.

- Facility of payment through Debit/Credit cards could not be made available as Ministry did not decide on how to deal with the financial implications.

- In a system with automated interface between the IT applications of the banks and GST portal, there should be no scope for errors such as invalid GSTIN and expiry of CPIN leading to non-reconciliation of GST receipts.

- Duplicate records were noticed in 6,748 cases in 5 Settlement ledgers, leading to inaccurate settlement of Rs. 416.07 crore IGST funds for the period from July 2017 to July 2018.

- There were no control totals like check sums or record level totals in files shared with Accounting authorities.

- The IGST algorithm was found to be defective picking up entries from wrong reports in IGST module.

- A field like turnover limit, prone to changes, was not made configurable.

- No alert was issued when the threshold of turnover prescribed for Composition Levy Scheme was crossed.

- Non-allocation or wrong mapping of registered taxpayers carried the risk of the returns filed/not filed by such taxpayers not being subject to any kind of scrutiny by the jurisdictional officer. In this highly IT intensive environment also, Range Offices had to physically take up problems created by an IT system for resolution.

UNCONSTITUTIONAL DEVOLUTION OF IGST:

The CAG pointed out a major constitutional fiscal blunder.

GoI has devolved Rs. 67,998 crore under IGST to the States/UTs adopting Finance commission formula for devolution of central taxes. Devolution of IGST is in contravention of the provisions of Constitution of India as Article 270 (1) of the Constitution excludes duties levied under Article 269 (A) (i.e. IGST) from list of taxes and duties to be distributed between the Union and the States. When the Ministry sent the accounting procedure for IGST to CAG for approval, the procedure for advance apportionment of IGST to the Centre and the States, as recommended by the GST council was agreed to by the CAG. But the procedure for devolution was not agreed to by the CAG stating that devolution of IGST was against the provisions of Constitution of India.

Further, devolution of funds using Finance Commission formula also has the impact of distribution of IGST funds among the States in a manner quite different from the ratio in which funds would have gone to the States in normal course as ITC cross utilisation or apportionment is based on Place of Supply concept.

When CAG pointed this out (April 2019) the Ministry of Finance intimated (May 2019) that in 2017-18 devolution of IGST was done, pending finalisation of accounting procedure for accounting of IGST balance, after taking formal opinion from Department of Legal Affairs, Ministry of Law and Justice. It further stated that Section 49 (5) of the CGST Act has been amended (August 2018), which provided that the ITC of IGST to be utilised first and then only to utilise ITC of CGST and SGST to pay CGST/SGST. This was done to ensure faster settlement of IGST. Ministry further stated that during 2018-19, the balance IGST has not been devolved as was done in 2017-18 and IGST balance available after regular settlement and refund is being apportioned provisionally.

The reply of the Ministry is silent on the aspect of corrective action taken by it for setting right the IGST amount devolved during the year 2017-18. Steps like amendment of Section 49 (5) of IGST Act providing for faster utilisation of IGST and provisional settlement of IGST balance during 2018-19 will only impact the settlement of IGST from 2018-19 onwards.

The reply of the Ministry was also silent on the aspect of impact on state revenues due to adoption of Finance Commission formula for distribution of IGST balance. It would be pertinent to mention here that in CAG's report on Account of the Union Government (Report No.2 of 2019), tabled in Parliament on 12 February 2019, it was advised that GoI needed to account for its share correctly and devolution should take place from Central share only and that the remaining 50 per cent should be apportioned to the States as per IGST Act. In view of this, the States' share of IGST should be accounted for properly, duly booking the subsequent adjustments as the Centre's expenditure.

The CAG reports, unless they create political storms, usually gather dust in Delhi's Bhavans and Blocks and may ultimately reach the archives. But this report calls for immediate action by the government; then remember, the CAG did not invent these facts, the government is already aware of them. Will they do something?

WHAT HAPPENS TO CAG'S REPORTS?

The reports of the CAG are submitted to the President who in turn cause them to be tabled before the House. Once tabled in the House, the Reports stand permanently referred to the Central and State Standing Committees on Public Accounts (PAC)/Committees on Public Undertakings (COPU). These specialised committees have been constituted to facilitate timely and intensive scrutiny of the Annual Accounts and the Audit Reports thereon. The Committees select those findings and recommendations from the CAG reports that they judge to be the most critical to the public interest and arrange for hearings on them. At the hearings of the Committees, the executive can be called to account for their actions/inactions. Based on their Examination, the Committees prepare and submit their reports to the Legislature that summarise the Committee's hearings, the action taken by the executive and include recommendations to improve administrative practices and procedures.- End of the Story. What about reports not touched by Committees? They survive and wither.

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