While the Government is trying hard with opposition parties to implement the Goods and Services Tax from April next year, a study carried out by the Comptroller and Auditor General of India [CAG] has brought out shocking details of the manner in which several states are operating the Value – Added Tax (VAT) system.

 Of the 23 states studied, it was found that in 10 states, there was a dip in the average growth of revenue during the past – VAT regime against those relating to pre-VAT period. Those included major states like Gujarat and Tamil Nadu. Though the report attributed the loss of revenue despite increase in tax base to tax evasion those states may raise the issue and seek more time to implement the GST.

 The performance audit found short-comings in the automation process, scrutiny of returns and tax audits, input-tax credit mechanism, cross verification, incentive schemes and monitoring post implementation. According to CAG investigation, at least 50% of the one lakh dealers covered under the CAG audit in 23 states were engaged in tax evasion. Tax evasion of Rs 873 crore was detected from the scrutiny of only 2600 returns in 15 states. Dealers obtained tax exemption worth Rs 1000 crore on a turnover of Rs 25000 crore from the sale of tax paid goods, without any proof of documentation. The study also found that 13 manufacturers did not reduce the maximum retail price of goods despite sharp decline in the rate of tax. As a result, the benefit of Rs. 40 crore was illegally retained by the manufacturers and dealers in the VAT chain instead of passing on the gains to consumers. In another major revelation, in some states, tax exempted manufacturers collected taxes from the purchaser of their goods without remitting it to the state. Consequently, the states incurred a sizeable revenue loss as the purchaser of those goods also claimed input tax credit on those transactions.

 CAG suggested e- filing of returns be made mandatory in GST and taxpayers must provide basic data for scrutiny to establish the trail of transactions leading to input tax credit. Timeframe for scrutiny of tax returns should also be specified and the periodicity of filing the returns must be fixed in line with the turnover of the dealer to reduce burden on the tax officers and ease monitoring on dealers.

 Therefore it is important for the Finance Minister that the deficiencies detected by the CAG report should be properly understood and adequate steps should be taken to prevent their recurrence when the GST becomes operational from April 2011. GST system could be smooth only if the information technology backbone is made perfectly so that cross-verification of returns does not have to depend on manual-intervention.

What is GST?

GST is a tax on goods and services with comprehensive and continuous chain of set-off benefits from the Producer’s point and Service provider’s point upto the retailer level. It is essentially a tax only on value addition at each stage and a supplier at each stage is permitted to set-off through a tax credit mechanism.

Under GST structure, all different stages of production and distribution can be interpreted as a mere tax pass through and the tax essentially sticks on final consumption within the taxing jurisdiction.