September 29, 2019

CAG Report on GST Reveals Fraud

J S Majumdar

THE GST Council, in its 37th session on September 20, 2019 in Goa, chaired by the union finance minister Nirmala Sitharaman and attended by the finance ministers of all states, has taken urgent steps in slashing down the tariff rates in starred hotels to encourage hospitality industry and tourism, particularly foreign tourism. This was the priority for the GST Council when the county is facing its worst economic slowdown, due to slump in consumption, and 45 years low unemployment rate.

Just two months ago the 36th GST Council meeting was called on July 27, 2019 to decide on GST rate cut on electric vehicles (EV) as the priority. That teleconferencing meeting had decided to slash down GST rates on EVs from 12 per cent to 5 per cent on their chargers or charging stations from 18 to 5 per cent and on e-bus service at zero GST. The changes came into immediate effect from August 1, 2019.

This urgent decision on EVs has direct bearing on GST Council’s refusal in its just concluded 37th meeting to cut GST rates on petrol/diesel run automobiles despite the industry facing a slumpdown resulting in lakhs of job losses. As of now, the auto industry bears the highest GST slab of 28 per cent plus minimum 15 per cent cess. Add to that the tax component on petrol and diesel, where GST does not apply because the highest slab of GST is 28 per cent, whereas central excise duty plus state-variable VATs together constitute 40.11 per cent to 59.78 per cent of the total cost of these petroleum products as of now.

There was no attempt by the GST Council to address the GST rates in the industries and the services. The GST Council has been ignoring the interests of the consumers. It is not ready to cut GST rates on medicines which is 12 per cent including most of the 356 medicines in the National List of Essential Medicines (NLEM). The GST amounts on medicines further increases with spiraling increase in the prices of all decontrolled medicines and 10 per cent annual increase of price-controlled medicines in NLEM.

In the indirect tax regime, the GST Council’s discussions are opaque, and decisions are final outside parliamentary scrutiny and public discourse though its decisions have direct bearing on the people due to indirect tax burden on them.

CAG has submitted its first audit report on GST in the parliament on July 30, 2019. This CAG report on GST has recorded some serious matters concerning the administration of GST which have generally been ignored by the corporate media and remain outside the people’s attention.

The government has already brought down the GST revenue collection target from Rs 7.61 lakh crore in interim budget to Rs6.63 lakh crore. Under the hyperbole of India achieving US$ 3 trillion economy by end of current financial year; the union budget 2019-20, presented on July 5, 2019, was also an admission of its failure in GST collections and, therefore, lowered the current year’s target by more than 12.87 per cent or by little less than one lakh crore.

This decline in indirect tax collection despite increase in the tax rates and spread of the tax net on all goods and services under GST regime, which came into effect on  July 1, 2017,has been confirmed by the CAG report. The report states, “The growth of indirect taxes of Government  of India(GoI) slowed down to 5.80 percent in 201718 over 201617 as compared to 21.33 percent during 201617, with GoI’s revenue from goods and services taking a 10 percent dip.”

The CAG report shows that while the people are paying more indirect taxes under GST regime, to government’s collection has gone down from pre-GST period. If people paid more and the government received less indirect taxes in FY2017-18, then where this huge money has gone? CAG has answered this in the part III of its report exposing the huge GST scam involved.

The CAG report attributed the reason as operational system failure. The report states, “…...on the whole, the envisaged GST tax compliance system is nonfunctional.” Why? Because of “inadequate coordination among the stakeholders such as Department of Revenue (DoR), Central Board of Indirect Taxes and Customs(CBIC) and GSTN  as well as failure to try out the system adequately before rollout.” The CAG report has confirmed the criticism by most of the opposition parties that GST was rolled out unprepared.

The CAG report has also accused that while administering the GST, Modi government had violated even the constitutional provision and GST law in distribution of fund to the states. The report states, During 201718, GoI resorted to devolution of IGST yearend balance to states as per Finance Commission formula, in contravention of the provisions of the Constitution of India and the IGST Act. This also had the impact of distribution of funds to the States on a completely different basis instead of ‘Place of Supply’ concept as envisaged in the IGST Act.”

About GST, the CAG report further stated that “the system is prone to ITC frauds.” It gave concrete examples to reveal the huge magnitude of GST fraud. Under GST law, a supplier gets Input Tax Credit (ITC) when goods are sold, and GST paid by the consumer. During July 1 – August8, 2018the total ITC claims in the tax returns was Rs8.19 lakh crore which included Rs6.94 lakh crore from Andhra Pradesh alone. When enquired by the CAG, the GSTN replied that out of total Rs 6.94 lakh crore ITC claims from Andhra Pradesh, “Rs 6.45 lakh crore pertaining to a particular taxpayer of Andhra Pradesh was erroneously claimed”. CAG was not convinced of GSTN’s statement of “erroneously claimed” by a taxpayer. In its report CAG rebuffed GSTN’s statement by stating in bold letters, “Unrealistic and erroneous claim of ITC of IGST claim by one taxpayer, representing 79 per cent of total ITC claims by all tax payers for a month, was allowed by the system, exposing the vulnerability of the system to fraudulent ITC claims.

The CAG report further states, “After removing the above figure from Andhra Pradesh, the State of Punjab constituted the highest IGST-ITC of 32.6 per cent of all India IGST-ITC balance and risk of irregular ITC credits could not be ruled out.”

New Nirav Modis are active in defrauding the GST of lakhs of crore rupees. How is this happening? CAG has put the entire blame on the current system of administration of GST by GSTN, which operates on public-private partnership basis including foreign private stake holders in it.

As per GST rules, ITC can be claimed only after matching invoices of ‘suppliers’ and ‘recipients’ (the ultimate consumers) filed by returns in the formats of GSTR-1 and GSTR-2 respectively. In addition, there is GSTR-3 giving additional details by the taxpayer entirely on self-assessment basis. But, filing of GSTR-2 has been kept in abeyance and ITC claim can be settled entirely on GSTR-3 basis without verification. CAG report states, “There was risk that the irregular ITC claims by the taxpayers might go undetected.”

Yet, there is no report as to whether, the GST Council meeting of September 20, 2019 has at all discussed the CAG report placed of July 30, 2019 or not; what was their conclusions and what remedial measures suggested except approving simplified tax returns in GSTR-9 and exempting filing this for taxpayer having less than two crore rupees of annual turnover.