The goods and services tax (GST) is a fundamental revolution in the way we think about indirect taxes. It has created a single market, helping move goods seamlessly across states. The GST system has enrolled close to 10 million businesses onto a single national technology backbone, the GSTN (GST Network), and already collected over Rs3 lakh crore in taxes in less than six months. GST was welcomed because it aimed to create an incentive for compliance, rather than punish non-compliance.
The basic driver of GST is the input tax credit (ITC). The tax paid by your suppliers should be subtracted from the tax you pay to the government. ITC is not a small deal. Without ITC, the tax you have paid becomes a cost. This tax can often be higher than the profit margin of the business. The market encourages suppliers who are GST-compliant. In fact, the threat of not being able to claim ITC is what drives compliance for most businesses, as it can have a major impact on cash flow and profits.
How do you design a system where a buyer can take credit for tax paid by the supplier? It was agreed that the best way was to get the buyer to “accept" the invoice of the seller by matching it with his own purchase record. In practice, however, this was implemented through a complex model which involved the taxpayer filing three returns a month, and data going back and forth. Moreover, the returns were designed for tax purposes and did not reflect the way a business operates. The filings had to be matched often a month after they were raised, within a short 5-day window, which stressed every business.
In addition, because of the worry that suppliers would not be uploading their invoices in time, buyers were allowed to take “provisional credit" for invoices yet to come. This created more complexities—mismatches, ITC reversal with interest, and reclaim of ITC. Finally the buyer was made liable by law, for the non-payment of tax by the supplier! This system was held in abeyance within a few months of the GST roll out, and the search began for a simplified system.
An alternative was to emulate state VAT (value-added tax). In VAT, a business uploads both sales invoices and purchase bills. Then the central system uses automatic matching. This sounds deceptively simple, but in reality there can be mismatches of up to 40%. So, any business could get a few dozen mismatched invoices, across 10 or more suppliers every month to manually correct—rapidly degenerating into a vicious cycle of trying to match “stale" records. Because of the high error rate, you would not be able to implement automatic ITC reversal without being unfair to businesses. Without automatic ITC reversal, the data quality would remain poor, as there would be little motivation to upload correct invoices and claims. The GST system would be unable to dig itself out of this hole.
Is there a better, more business friendly way of implementing the original idea of buyers “accepting" the invoice from the seller?
We know that every buyer, big or small, whether or not they run on an automated accounting system, do verify their supplier’s invoices before releasing payments. No one pays a supplier whatever they ask for! Filing taxes should not be orthogonal to business; it should be a seamless part of the regular business flow. So how do we do this?
Basically, the guiding principle is that ITC should only be provided on matched invoices. To do this, first, the format in which the seller uploads invoices to the GSTN system should be what businesses are used to. Business should be able to continuously upload their invoices at a line-item level at a frequency of their choosing, hourly, daily, weekly, monthly—whatever works for them. The buyer in turn would be able to “accept" the invoice at a frequency and time of their choosing. Upload and acceptance of invoice should be enabled through multiple channels—web portal, mobile devices, spreadsheet based offline tools and direct integration of accounting packages to the portal.
All invoices uploaded and accepted at the time of a designated monthly cut-off, would be eligible for ITC. Buyers will encourage sellers to upload invoices, and will themselves “accept" invoices quickly to get the ITC. Since now getting and saving money is contingent on good data, within a matter of months the data would be very clean. With this data the system can generate tax filings automatically!
The complexity of provisional credit can also be abolished. If you do not find your invoice there, you should have a way to notify your suppliers if they have missed it. Moreover, buyers should not be held liable for the seller not paying his taxes. Whether the supplier has paid the tax is for the government to enforce, using big data and analytics.
This will lead to happier taxpayers, an increase in tax revenue, and fulfil the vision of a Good and Simple Tax!
Nandan Nilekani was the founding chairman of UIDAI and is currently the chairman of Infosys. When he was in Government, he was also one of the architects of the GST Network (GSTN). Infosys is responsible for building and managing the GSTN backbone. The company won the contract to build the GSTN technology platform in 2015, when Nilekani was neither with the Government nor with Infosys.