AUGUST 01, 2024

By M S Mani and Rajeev Pallath

THE statement that "change is the only constant" is especially true for GST, as businesses have been required to deal with multiple changes since GST's introduction, with various processes having been simplified and the technology platform made more responsive. However, even after 7 years of GST implementation, very little attention seems to have been given to the GST assessment process. GST assessment is largely driven by audits conducted by various authorities across states that the business operates in. This results in multiple audits being faced by the same legal entity across operating states.

Managing dual administration by both the Central and State governments poses challenges for companies, requiring consistency across various filings. Consolidating administration under either Central or State authority could simplify processes and reduce duplication and costs, aligning with India's goal of a unified market with single audit and assessment.

In the pre-GST landscape, the taxation of manufacturers and service providers differed considerably, leading to divergent audit practices.

Manufacturers were primarily governed by state Value Added Tax (VAT) laws. Each State had its own VAT regulations, resulting in multiple assessments for manufacturers operating in different jurisdictions. This complex structure often led to compliance challenges, as manufacturers had to manage varying tax rates, exemptions, and compliance requirements across States. Consequently, they were subjected to frequent audits from different State authorities, increasing the burden on businesses and complicating compliance.

In contrast, service providers benefitted from a centralised registration system under the Service Tax regime that allowed them to operate under a single set of regulations, leading to singular assessment by the Central tax authority. This centralised approach not only simplified compliance for service providers but also reduced the frequency of audits. As a result, service providers faced less administrative pressures compared to their manufacturing counterparts.

Currently, the assessment process is cumbersome and time-consuming for taxpayers. Challenges include complex regulations, varying interpretations by officials, evolving business dynamics, the impact of amendments, audit readiness, and clarity on tax matters.

Since the introduction of GST in July 2017, over 10 million GST assessments have been conducted across India.

Approximately 30% of these assessments have resulted in further scrutiny or audit by tax authorities, contributing to compliance challenges for businesses.

The frequency of assessments varies significantly across States, with States like Maharashtra, Karnataka, and Gujarat conducting assessments more frequently due to higher business density and revenue collections.

In some States, the rate of assessments leading to litigation has risen sharply, with up to 15% of assessments resulting in disputes or appeals.

According to various reports from the Ministry of Finance and the GST Council, there has been a steady increase in the number of GST assessments conducted over the years. In FY 2021-22, the GST authorities issued about 80,000 to 1 lakh audit notices. In FY 2022-23, this increased to 1,25,000 notices.

GST revenue collections have shown significant growth, which often correlates with increased assessments. For example:

In April 2022, GST collections reached approximately Rs. 1.68 lakh crore, the highest since the implementation of GST.For the fiscal year 2022-23, the total GST revenue collected was about Rs. 18 lakh crore, reflecting enhanced compliance and enforcement efforts. As a result of heightened scrutiny, the compliance rate has improved significantly. The government reported that around 80-90% of taxpayers were compliant with their GST obligations in recent years.

There has been a noticeable increase in penalties imposed for non-compliance, amounting to several thousand crores in recent years. For example, in FY 2021-22, penalties worth around Rs. 10,000 crore were levied.

While there is an increase in the number of assessments, the taxpayers are also facing various challenges.

The specific issues faced by taxpayers include undergoing assessments and audits by multiple State authorities without relief provisions, inconsistent treatment of similar transactions due to different State interpretations, increased litigation due to multiple proceedings, and escalated compliance costs for multi-state operations.

While taxpayers are facing the challenges in concluding the assessments, the department must think of reducing such challenges to provide a better environment for doing business as the government is also promoting the "Ease of doing Business".

Further proposed solutions to tackle these challenges include establishing a GST Assessment & Audit Bureau comprising Central and State authorities to ensure comprehensive representation and federal structure preservation. Differentiated assessment approaches based on taxpayer scale and operations aim to streamline processes, enhance consistency, and reduce compliance burdens. Centralised audit coordination and the creation of specialised audit teams are also proposed to improve efficiency and align with federal principles.

One significant proposal to streamline the audit process in the post-GST framework is to designate the registered office of a company—or its principal place of business as recorded by the Registrar of Companies (ROC)—as the primary audit location. This approach would provide a consistent and centralised point for auditors to conduct assessments.

Centralisation will reduce the logistical challenges associated with auditing multiple locations, especially for businesses with operations spread across various States. Auditors can focus on one location, streamlining the audit process and potentially reducing the time and resources required for both the auditor and the taxpayer. Further, the registered office is typically where the core management and administrative functions are based, providing auditors with access to key personnel and records necessary for an effective audit.

Frequency of audits is another critical area that warrants attention in the post-GST landscape. A proposed approach is to conduct audits once every three years for most taxpayers, to strike a balance between maintaining compliance oversight and reducing burden on businesses and allowing them to focus on growth rather than continuous regulatory scrutiny.

However, in cases where significant violations are detected during earlier audits, it may be prudent to require annual audits for those specific taxpayers. This tailored approach to audit frequency ensures that businesses with a history of compliance issues are monitored closely while giving space to compliant businesses to operate without excessive oversight.

Centralised assessment promotes uniformity in interpretation and application of GST laws across States to help reduce discrepancies in assessments and ensure that all taxpayers are treated fairly, regardless of their location.

The implementation of a unified audit system should align with broader fiscal initiatives, such as rate rationalisation and GST coverage expansion, as highlighted by the Finance Minister in her recent Budget speech.

A comprehensive roadmap could be structured as follows:

Phase 1: Pilot Program

Launch a pilot program for the unified audit protocol focused on service providers. This phase should include identifying a representative sample of businesses to participate, allowing authorities to gather insights and assess the effectiveness of the new protocol.

Phase 2: Evaluation and Refinement

After completing the pilot program, evaluate outcomes and gather feedback from participants. This assessment will inform necessary modifications to the audit protocol before expanding it to other sectors.

Phase 3: Expansion to Manufacturers and Traders

Based on the learnings from the pilot, roll out the unified audit protocol to manufacturers and traders, incorporating any adaptations required for different sectors.

Phase 4: Continuous Improvement

Establish a framework for ongoing evaluation and feedback from stakeholders, allowing for continuous improvements to the audit process. This ensures that the protocol remains responsive to evolving business landscape and regulatory requirements.

Further consolidating assessments at a central level or state level, the government can develop specialised teams that focus on specific industries or tax issues. This expertise can lead to more accurate and informed assessments, improving overall compliance.

Centralised assessment can help alleviate the workload on state tax authorities by delegating complex cases to a central body. This can lead to more efficient use of resources and allow local officers to focus on other compliance activities.

Centralised processes can be streamlined, resulting in faster turnaround times for assessments. This is particularly beneficial for businesses that may otherwise face lengthy assessment processes at the state level.

A centralised approach can provide a single point of contact for taxpayers, simplifying communication and reducing confusion related to compliance requirements and procedures.

Implementing a centralised assessment system requires a robust IT infrastructure to manage data and facilitate efficient communication between taxpayers and tax authorities. Any technical issues could hinder the process.

Centralised assessment under GST has the potential to enhance the efficiency, transparency and fairness of the tax assessment process. However, careful planning and execution are critical to address the challenges associated with local context, accessibility, and technical infrastructure. Overall, if implemented effectively, it could lead to significant improvements in tax administration and compliance in India.

These measures aim to optimize GST assessments and audits thereby fostering efficiency, consistency, and mutual benefit for taxpayers and regulatory authorities.

Conclusion

The judiciary consistently criticizes instances of departmental overreach in verification proceedings such as scrutiny and audits under the GST regime, highlighting them as contentious issues burdening compliance. It is crucial to harmonize and clarify these procedures to protect both Revenue interests and that of genuine taxpayers. Section 6 of the CGST Act aims to shield taxpayers from multiple authorities, emphasising compliance aligned with constitutional principles against double jeopardy. Upholding the doctrine of 'res judicata' is equally imperative, ensuring that matters resolved by one authority cannot be re-litigated elsewhere. Excessive compliance demands on taxpayers can potentially undermine revenue collection. Therefore, minimising redundant scrutiny and audit activities within a single period is essential to relieve taxpayers of unnecessary burden. Authorities must exercise restraint to avoid overlapping jurisdictions. Ultimately, the CBIC should intervene decisively to resolve existing confusion and streamline these processes effectively.

Centralised assessment is necessary in the Indian GST framework to create a more efficient, transparent and equitable tax system. By streamlining the processes, reducing administrative burden and fostering specialisation, it can lead to improved compliance and taxpayer satisfaction while minimising opportunities for corruption and inconsistencies. Ultimately, this reform aligns with the broader goal of enhancing the ease of doing business in India and ensuring a fair tax environment for all stakeholders.

The transition to a unified audit process in the post-GST era presents a valuable opportunity for India to enhance compliance, reduce administrative burdens, and promote economic growth. By learning from both domestic and international experiences and establishing a clear roadmap for implementation, India can foster an environment of transparency and accountability in its tax administration. A successful integration of a unified audit system will not only simplify compliance for businesses but also strengthen the overall GST framework, contributing to the nation's fiscal health and economic development of the country.

(The authors are working with Deloitte India as Partner and Director, respectively. All views expressed are the personal views of the authors.)