The Goods and Services Tax (GST) Act brings sweeping change to the Indian tax system. It completely overhauls existing tax rates and processes. It establishes an online portal for compliance. And it brings transparency to the entire process by way of compliance ratings. All registered taxpayers will be publicly rated according to how well — or how poorly — they comply with GST regulations.
Section 149 of the Central Goods and Services Tax Act, 2017, deals with compliance ratings. It states that every registered person will be assigned a GST compliance score by the government based on their record of compliance with the provisions of the GST Act. Given that the rating system will be entirely new, everyone – at least theoretically — will start at an equal level, but if a taxpayer is non-compliant then his rating will go down.
The GST Council is expected, in due course, to approve the parameters against which taxpayers will be evaluated. They will probably include uploading invoices, promptness of paying taxes, timely filing of returns, transparent and error-free reconciliations, and cooperation in dealing with tax authorities.
The rating system is meant to incentivize taxpayers to comply with the GST law, which in turn will help facilitate a seamless transition from the existing tax system to the new. The scores shall be updated at periodic intervals.
Why is a higher rating desirable?
A GST compliance rating will include the name of the taxpayer and his GST identification number (GSTIN) — all of which will be placed in the public domain on the GST network (GSTN) website. Thus all businesses have an incentive to manage their compliance effectively, not just to reduce headaches but also to maintain a high compliance rating.
A business’s compliance rating can impact it in several ways, including:
- Gained/missed business opportunities — With potential business partners able to check a fellow taxpayer’s rating, having a low rating could result in being passed by for a new business opportunity, or dropped from an existing relationship. For example, the new law requires invoice matching for input tax credits (ITC). A dealer procuring goods from a supplier will not be able to claim credit for the tax paid on the goods purchased until the seller uploads the invoices and the claims of the dealer and supplier are matched. Thus, if a dealer is comparing two suppliers offering goods at the same price, the dealer may opt for the one that has a better compliance rating. Dealers will not want to do business with a seller who may cause problems with the ITC cycle, thus costing them money.
- Better/worse administrative treatment —Businesses with a higher rating can expect for their needs to be prioritized in the GSTN ecosystem. For example, refund claims are likely to be processed on a merit basis, wherein refunds to taxpayers may be proportionate to their ratings. On a scale of 1 – 10, where a taxpayer’s degree of compliance increases as we move up the number scale, i.e., 1 indicates least compliant and 10 indicates highest compliant, a rating of 9 would entail a faster refund while a rating of 2 would necessitate refund only after thorough scrutiny (i.e., delayed refund).
- Decreased/increased scrutiny — Selection of cases for audit or scrutiny will also be influenced by a taxpayer’s GST compliance rating. A high rating will likely indicate to the GST Council that things are in order — no need to take a closer look. Adversely, a lower rating could very well indicate compliance problems that warrant an audit, something that will require extra resources from the taxpayer under scrutiny.
With the transition to GST likely to be harder for small and medium businesses than for larger ones, former Finance Minister P. Chidambaram is of the view that the GST rollout date should be pushed back to October 1. He said in an interview, “the proposed date for the rollout is July 1. The bigger guys can employ talent and skills to quickly get on to GST. Businesses in tier II and tier III towns who only have a local accountant to handle their accounts and are not yet completely familiar with electronic filing, it’s a huge burden on them.”
No matter the rollout date of GST, compliance — and the GST rating — will take on great importance for taxpayers of all types. Though we are at too nascent a stage to analyze the actual impact of how this provision will affect normal day-to-day business activities, it is always advisable to be prepared. In the true sense, GST is a new legislation with new concepts, and it is one of the most ambitious tax reforms that India has undertaken since independence. The onus is on businesses to get it right, and their GST rating will be an indication for all to see whether they’re succeeding.
Avalara is an experienced application service provider (ASP), partner with authorized GST Suvidha Provider. To understand how our cloud-based application i.e. Avalara TrustFile GST can help you with GST compliance automation, contact us through https://www.avalara.com/in/products/gst-returns-filing.
This blog is authored by CA Priya Madrecha. She is a moderator at gstindia.net, a forum on Goods and Services Tax.