Union Government Department of Revenue (Indirect Taxes – Goods and Services Tax) has issued Report No. 11 of 2019 i.e. Report of Comptroller and Auditor General of India on GST for the year ended March 2018. This is the first Audit Report of CAG on Goods and Services Tax (GST), prepared on the basis of audits conducted during the year 2018-19. The Report acknowledges the magnitude of the tax reform that GST has been and the efforts of all the stakeholders, including the businesses, in transiting to this system.
This report has been divided into four chapters, the important points mentioned in each chapter has been given below:
1. Chapter I : Implementation of Goods and Services Tax (GST)
The roll-out of GST has been a landmark achievement of the Government with respect to unifying multiple central and state taxes barring a few goods/sectors and availability of Input Tax Credit (ITC) across the entire value chain. The multiplicity of tax rates has also been eliminated to a large extent. The objective of the rollout of a single IT-based interface for the taxpayer has also been achieved to some extent.
One significant area where the full potential of GST roll out has not been achieved is the roll out of the simplified tax compliance regime.
- Even after two years of the rollout of GST, system validated Input Tax Credit through “invoice matching” is not in place and the non-intrusive e-tax system still remains elusive.
- The complexity of the return mechanism and the technical glitches resulted in a rollback 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.
2. Chapter II : Revenue and return filing trends
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.
During 2017-18, Government of India resorted to devolution of IGST year-end balance to the States as per Finance Commission formula, which is in contravention of the provisions of the Constitution of India and the IGST Act. This also has the impact of the distribution of funds to the States on a completely different basis instead of ‘Place of Supply’ concept as envisaged in the IGST Act.
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 INR 6,466 crore of GST Compensation cess to the Public Account during 2017-18.
While it was expected that compliance would improve as the system would stabilise, all returns being filed showed a declining trend of filing from April 2018 to December 2018.
The filing percentage of GSTR-1 returns (monthly returns on outward supplies) were throughout less in comparison to the corresponding filing of GSTR-3B returns (summary self-assessed return). The introduction of GSTR-3B resulted in filing of returns with ITC claims which could not be verified and it appears to have disincentivised filing of even GSTR-1. Since filing of GSTR-1 is mandatory, short-filing is an area of concern and needs to be addressed.
GSTR-3B being only a summary return, short-filing of GSTR-1 implied that the tax departments did not have complete invoice level details as filed by the suppliers, which could be used to verify details given in GSTR-3B or to arrive at turnover.
3. Chapter III: IT audit of GSTN
In 16 cases, the key validations / functionalities as existing in the rolled out modules were not found aligned to the applicable provisions.
System validations were not aligned to the provisions of the GST Acts and Rules, leaving the following crucial gaps in GST Registration module:
- System failed to validate and debar ineligible taxpayers from availing Composition Levy Scheme.
- Mandatory fields were made optional, accepting junk values.
- TDS registrations were allowed under an invalid category.
- Lack of validation of key fields in Registration (Legal Name, Type of Business and CIN) with CBDT and MCA Databases.
The payment module, despite being in operation since 1 July 2017, was fraught with operational deficiencies like
- Delay in updating the Electronic Cash Ledger (ECL) even after successful payment of tax by the taxpayer.
- Lack of assurance on minimum service requirements prescribed for banks.
- Issues in reconciliation of GST receipts.
- Issues such as payment initiated before expiry of Common Portal Identification Number (CPIN) but Challan Identification Number (CIN) generated after expiry of CPIN and incorrect display of messages to taxpayers were not dealt with until pointed out by audit.
- 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.
All the IGST Settlement Ledgers were not being generated due to non-implementation of corresponding GST modules, like imports and appeals.
- The incomplete IGST ledgers were partly responsible for INR 2,11,688 crore of IGST balance remaining unsettled during 2017-18.
- Duplicate records were noticed in 6,748 cases in 5 Settlement ledgers, leading to an inaccurate settlement of INR 416.07 crore IGST funds for the period from July 2017 to July 2018.
- Incorrect settlement of IGST amounting to INR 359.46 crore during the period from July 2017 to July 2018 was noticed because of erroneous entries in settlement ledgers due to the algorithm picking up entries from the wrong category of taxpayers.
- Unrealistic erroneous claim of ITC of IGST by one taxpayer, representing 79% of total ITC claim by all taxpayers for a month, was allowed by the system, exposing the vulnerability of the system to fraudulent ITC claims.
System design deficiencies
- 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.
3. Chapter IV : Compliance audit of GST
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. In absence of access to GST data, the conclusions in this chapter 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.
Some of the audit findings on Transition Credits indicated that data / red flags available in ACES have not been efficiently leveraged to identify and reject inadmissible credits.
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.
CAG is a premier auditor of the Economy and GSTN is the premier tax collecting agency. This report indicates gross negligence on the part of the GSTN, which led to inconvenience for millions of taxpayers and shorter tax collections for government.