The task of simplifying the return filing mechanism under the Goods and Services Tax (GST) regime is proving to be onerous for the government. It has been a cause for concern right from the start. The industry resisted the initial system of filing three returns a month and one annually, forcing the government to simplify the process. But that is far from being achieved.
In November 2017, the governing body of the new indirect tax law, the GST Council, decided to suspend the GSTR-2 form, filed for every purchase made during a month, and GSTR-3 form, the consolidated return for monthly sales, purchases and tax liabilities, and temporarily replaced them with a summary GSTR-3B return form.
It has been more than five months since then and the government is yet to find the 'right' return filing mechanism, which is crucial as it lays down the processes of invoice matching and input tax credit claims.
While finalising the return filing process, the GST Council has to cautiously strike a balance between safeguarding the government's revenue and ensuring convenience of taxpayers. And that's a challenge the council is struggling with, as is evident by the time the whole process is taking.
A group of ministers (GoM) headed by Bihar's Deputy Chief Minister Sushil Modi has been considering two models for return filing - Model A, recommended by the returns committee constituted by the GST Council, and Model B, recommended by Nandan Nilekani, Chairman, Infosys and Former Chairman of UIDAI. However, the final decision on the GST return mechanism will be taken only by the GST Council, the governing body of all GST-related issues.
A or B?
Though both the models recommend a monthly return mechanism, Model A is more in favour of taxpayers as it allows provisional input credit. Model B, on the other hand, is in favour of the government as it is high on preventive safeguards, allowing minimal leakage of revenue.
There are some key differences between A and B, even though the most basic features - tax liability fixed on the basis of self-declared invoices, supplier uploading the invoice, unidirectional flow of invoices for calculation of liability and input tax credit and the absence of system-based matching - are the same.
In Model A, a taxpayer has to file a summary return, and also upload invoices for sales and purchases that attract reverse charge. The model entails that the buyer be provisionally allowed to take input tax credit on self-assessment basis, followed by offline matching of the invoices amongst buyers and sellers. It also proposes to introduce a periodic rectification facility (three months) for the supplier to update the missing invoices and pay taxes. At the end of this period, the unmatched self-declared credit would have to be reversed.
Further, it proposes a spread-out return filing process: for taxpayers with revenue of more than `1.5 crore, the due date for return filing should be 10th of the next month and for the rest, the due date should be 20th of the next month.
The fundamental difference between the first model and the one proposed by Nilekani is that the latter does not allow a buyer to claim provisional credit on the basis of invoices uploaded by the seller. The second model proposes that input credit would be available only when the buyer accepts the invoice uploaded by the supplier. Once the buyer has accepted the invoice, the seller will not be able to edit it. Since there is no provisional credit available under this model, there is no need for reversal of unmatched credit.
"The first seems beneficial for assessees as it allows provisional credit; but, at the same time, it is likely to increase the compliance burden for assessess as it has an additional requirement of filing of reconciliation report after three months. On the other hand, Model B is high on preventive safeguards as it allows minimal leakage of revenue by not allowing provisional credit, which is beneficial to the government," says Anita Rastogi, Partner, Indirect Taxes, PwC.
Finding the Middle Path
Clearly, neither of the models is flawless. The two major issues of contention in both are the provisional input credits and linking credit to tax payment.
A presentation made during a meeting of the GoM recently highlighted the 'risk' of buyer-initiated fraud in allowing provisional input credit as suggested by the first model, as also the increase in compliance burden. On the issue of linking availability of input credit to tax payments, the GoM sees a problem in both the models. The GoM finds the first model that allows the taxpayer to file a reconciliation report with reversal of unreconciled credit too complex. The second model suggests the credit be available only when buyer accepts the invoice uploaded by the supplier, negating the need for reversal of input credit. Without the threat of reversal, the GoM says, there is no motivation for the buyer to be diligent or avoid suspicious transactions.
The GST authorities are now striving to strike a balance. While addressing the media recently, Sushil Modi said that the government is now looking at a fusion model that would incorporate proposals from both the models as well as other suggestions from the states.
This fusion model would be built on three considerations - safeguarding the interest of revenue, avoiding inconvenience to taxpayers and avoiding complexities.
Here's what can be expected from it. The fusion model would allow the seller to continuously upload invoices and the buyer to continuously see it, with the option of 'accepting' the invoice uploaded by the former. Once the buyer has accepted the invoice, the seller will not be able to edit or delete it.
The GST Council may accept the proposal of allowing input tax credit only when the buyer accepts the invoice uploaded by the seller. The Council may retain the linking of credit with payment of tax by the supplier, since the GoM is strongly batting for it.
When it comes to reversal of unmatched credit, it is likely that the GST Council may opt for semi-automated reversal through administrative order. Taxpayers can also hope for relief from online matching of invoices - this has been a major cause for worry for both the taxpayers as well as for the GST Network. Gautam Mukherjee, General Manager, Global Delivery - India at Avalara, a GST compliance company, says that the government has realised that its GST network needs to be freed from the unnecessary load of system-based matching of invoices.
But even the fusion model needs to be fine-tuned. "There are many unresolved aspects related to the fusion model such as the scope of semi-automated reversals, difference in timing for filing annexures and the final return. These need to be cleared before the government goes ahead with the new system. An unrehearsed and rushed implementation may not yield the desired results," says Harpreet Singh, Partner in KPMG.
Pressure is mounting on the GST Council to finalise the return filing process as the government grapples with revenue leakage in the absence of invoice matching. The GST Council meet scheduled on May 4 could finally pave the way for a simpler return filing system.