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Returns Control The key to ensuring accountability


All modern tax administrations, both direct and indirect, rely on the taxpayer to self-assess their liability and pay taxes accordingly. The emphasis is on trust in the taxpayer. That said, the tax authorities must be informed that the correct tax liability has been discharged.

Any legal person carrying out an activity liable to be taxed must register. After registering, a legal person must file returns. Statements are actually honest statements by the taxpayer of liability with details of how that liability arose. It also provides details on how liability is discharged.

Feedback is therefore essential to enable risk-based auditing and controls. Ideally, these controls should be technology driven. This is especially true in a credit-based tax system like the Goods and Services Tax (GST) which operates on the system ensuring there is no tax on tax. Tax credit paid at earlier stages of the value added chain available for disclaimer at a later stage.

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This is the USP of the GST – therefore, to the extent of the credit used, there is less revenue for the government. It is not the case of anyone that such credit should be refused. Nor can it be anyone’s case that undue credit is misused with criminal intent to defraud the Treasury.

It should be remembered that the value added tax system is a tax system that requires the government not only to collect substantial sums, but also to return a large part of them to the same people in the form of credit. A return accompanied by an invoice provides the government with a mechanism to verify the details of procurement has taken place, to whom and at what value. Returns are therefore key documents.

A declaration and an invoice constitute a potential claim on public funds. It was therefore the GST Act as it stood that provided for the matching of returns as a method of verifying the accuracy of claims made. Unfortunately, matching returns – suppliers with recipients, universally accepted as being an essential tool to control evasion, never took off. The technological support necessary for its effective implementation was lacking.

Union Budget 2022-23 in Article 106 removed Articles 42, 43, and 43A of the CGST Law, effectively removing the two-way communication process in filing returns. A key provision that would have catapulted India to the rank of the most technologically advanced tax administration has gone unrecognized and unfortunate. The budget proposed to automatically generate a statement of incoming supplies that would hopefully support any possible mischief attempt. It hasn’t happened yet.

Returns once filed cannot remain in the ministry’s systems. They must be examined to confirm the veracity of the claims made. The GST Act (Article 61 of the CGST Act) provides for the review of returns and other information provided by the registrant.

It is in this context that we must see the final instructions – No. 02/2022-GST dated March 22, 2022 – issued by the Central Board of Excise and Customs Tax (CBIC). These provide a standard operating procedure (SOP) for the review of declarations for fiscal years 2017-2018 and 2018-2019. This SOP is meant to be an interim measure until technology provides solutions.

The SOP aims to ensure consistency in the selection/identification of statements to be reviewed, the methodology for reviewing those statements, and other related procedures. Given the large number of registrants and returns available, the SOP seeks to ensure that the process of selecting returns for scrutiny is reasonably risky. The Directorate General for Risk Analysis and Management (DGARM) has been tasked with selecting the GSTINs registered with the central tax administration, whose declarations must be examined and informing the field teams.

The SOP makes it clear that the officer is expected to rely only on information available with him or with the department. The instruction states that there should be a minimum interface between the agent and the registered person. It is good and necessary. The review should not become a fishing exercise.

This SOP relates to the review of returns filed in 2017-2018 and 2018-2019. It must be done urgently within a limited time. There is a risk that the process will be blocked by a time limitation. The legal time limit for issuing a notice is three years from the date of filing of the annual declaration in cases other than those of fraud – and five years, in the case of fraud.

So the current trend of scrutinizing returns is a welcome step. That said, the rampant escape as evidenced by the cases detected by the department is cause for serious concern. CNBC-TV18’s Timsy Jaipuria estimated that detections of such cases of fraud were in the region of a whopping Rs 52,000 crore. The review is the first step in verifying such evasion. Regular auditing and intelligence-based enforcement must go hand in hand. And I hope our taxpayers will realize the importance of paying taxes due – and the folly of trying to evade taxes.

— The author is President (retired) of the Central Board of Indirect Taxes and Customs. Read his other articles here.

First post: STI


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