[Sri Janani Seenivasan and Krishna Ravishankar are 4th year B.A., LL.B. (Hons.) students at National Law University, Jodhpur]
The Goods & Services Tax (GST) Compliance Rating is a system introduced by the Indian government under section 149 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’), to assess the compliance behavior of the taxpayers. This system assigns a rating or score to businesses, based on their level of adherence to the GST rules and timely submission of returns. It applies to every taxable person, irrespective of their nature, or size, or turnover of their businesses. The purpose of this framework is to encourage businesses to be fully tax compliant and enhance transparency in their operations by uploading invoices and other relevant documents on time. However, this system is not without significant flaws in its implementation.
This post begins by examining the intention behind the introduction of the GST compliance rating system. In the second part, it delves into the functioning, as outlined under section 149 of the CGST Act, and identifies the potential challenges in its implementation. Thirdly, the post conducts a comparative analysis with similar taxation systems across different commonwealth jurisdictions and seeks to provide solutions to the gaps in the present regime under section 149.
The Need for Compliance Rating: A Bird’s Eye View
The compliance rating system serves as a multi-dimensional tool that harmonizes the interests of various stakeholders, including buyers, suppliers and creditors. Compliance rating scores helps prevent issues related to the reversal of Input Tax Credit (ITC) for buyers. ITC is a mechanism by which businesses can reduce the tax they pay on the sales; i.e., output tax, by claiming credit for the GST they have already paid on their purchases; i.e., input tax. If businesses delay filing their returns under Form GSTR-1 and Form GSTR-2, it can lead to delays in ITC, affecting the entire chain of buyers, who may have to end up paying full tax without benefitting from this credit. This is where compliance rating becomes crucial for buyers, allowing them to evaluate the risk of supplier non-compliance in fulfilling GST obligations and accordingly, to make an informed decision before entering into the said transaction.
From the perspective of suppliers, this system demonstrates their credibility and ability to meet GST obligations promptly, thereby attracting and retaining customers. For creditors, these ratings offer a valuable tool to evaluate the creditworthiness of a business before extending credit, ultimately reducing their default risk.
The Pitfalls of Compliance Rating: Assessing Section 149’s Lacunae
While the compliance rating system serves numerous benefits to enhance transparency, it is not free from shortcomings. Firstly, section 149(1) states that every registered person “may” be assigned a compliance rating score, making this mechanism discretionary, rather than mandatory. It is important to note that the word ‘may’ was chosen initially, since compliance ratings could only be introduced after one year of GST implementation, allowing sufficient time to collect data and generate meaningful ratings. Using the term ‘shall’ could have misled the taxpayers into believing that a lack of a rating indicated a compliance failure in the initial year. However, as raised by the Tamil Nadu Minister in the 7thGST Council Meeting, the continued use of this discretionary language makes the entire compliance rating system optional, leaving its implementation to the government’s sweet will. This could lead to uneven enforcement or delayed implementation, not serving the intended purpose of encouraging compliance. Therefore, the authors argue that the system must be made mandatory by replacing ‘may’ with ‘shall’ to achieve its purpose.
Secondly, section 149(2) states that the score may be determined on the basis of such parameters ‘as may be prescribed’. However, since the actual rating system is yet to be formally notified, there is a lack of clarity regarding the exact parameters that would be used to evaluate taxpayers. Various experts suggest that factors such as timely payment of taxes, prompt filing of returns, reconciling transactions, adherence to the prescribed timeframes, and cooperation with the GST authorities, might be considered. Nevertheless, the absence of clear, defined criteria within the statute creates significant challenges. This ambiguity can lead to an inconsistent application of the rating system, forcing taxpayers to rely on ‘guesswork’ in determining which compliance measures are most crucial for maintaining a high rating.
Thirdly, the section fails to specify which authority is responsible for determining and updating these parameters, a concern also raised by the Minister from West Bengal during the 7th GST Council Meeting. This is because different rating bodies would assign different aggregate rates, creating confusion amongst taxpayers. Without clear guidelines on how ratings are to be determined and what rating principles are to be used, taxpayers may struggle to maintain and improve their ratings.
While the Secretary to the GST Council indicated that the compliance rating would be conducted and managed by the Goods and Services Tax Network (GSTN), this raises questions about the delineation of responsibilities between GST Council, a constitutional body set up under Article 279A of the Constitution, vis-à-vis GSTN, a public-private partnership established by the Government of India. A suggestion was made to include ‘by the GST Council’ in clause (2), but this has not yet been reflected in section, as it currently stands. This ambiguity could potentially lead to excessive executive control, disadvantaging the taxpayers. Apart from that, from the point of view of taxing authorities, making the already over-burdened taxing authority to perform another enforcement function would only add to the existing workload of the Revenue, leading to lesser effective enforcement. Therefore, the GST Council should be given the authority to set out the parameters for scoring.
Fourthly, section 149(3) states that the compliance rating score may be periodically updated and shall be placed in the ‘public domain’, meaning that anyone can access the rating of a taxpayer. While this initiative promotes transparency, it raises concerns about commercial privacy and data security. Businesses will have little control over the public disclosure of their ratings. Although these scores themselves may not be highly sensitive, they are part of a broader set of commercial data that could be exploited to harm their reputation. Given that the GSTN has previously suffered cyber-attacks, the risk of future breaches remains, exposing taxpayers to potential security threats in an increasingly digital world.
Plugging the Existing Loopholes: Global Lessons for Better Enforcement in India
Compliance rating as an enforcement method seems to be a unique means used by taxing authorities only in the Indian context and there exist much more effective enforcement mechanisms from other taxing jurisdictions that India could learn a lesson or two from. While the biggest concern is the lack of adequate parameters, given that the regime undersection 149 is still not in force and is nascent, it is prudent to expect such parameters to be laid down in the future for the assignment of scores. However, the other potential issues that arise out of compliance rating are required to be addressed before its very implementation.
As stated earlier, one of the greatest concerns of Indian businesses would be the constant scrutiny that they would be subjected to every financial year. Coupled with this is the access to this information on a public domain which could have serious implications, not only on its commercial privacy, but on its commercial relations. In order to tackle this issue, one could look into the Nearest Neighbour program of the Australian Tax Organization. This program provides for a personalized tax compliance risk profile and the results of the same are made available to the concerned taxpayer. Integrating such an approach would balance out the privacy concerns of business registered under Indian GST. Further, other businesses who are willing to enter into commercial transactions with the concerned business could always ask for this personalized risk assessment as part of its due diligence.
From the point of view of lessening the workload of the authorities who would be overburdened with constant scrutiny, as well as to lessen the excess executive control, one could surely look into the Integrated Risk Assessment System of Canada’s Revenue Agency. To make enforcement more targeted and effective, Canada looks at scrutinizing only those large businesses which have a track record of non-compliance with regards to tax payment and performs random audits only those selected companies. The Indian compliance rating system could also be designed in a similar manner, wherein scores could be assigned only to those businesses who have frequently erred in tax compliance. This would not only lessen the enforcement burden of the authorities, but also would facilitate better enforcement. A similar approach is taken by the New Zealand’s Inland Revenue, wherein such scrutiny of tax non-compliance is targeted and specified against non-compliant sectors over a specified period of time. The Indian GST Authorities could carry out this targeted scrutiny for only certain sectors, in order to lessen its enforcement burden.
The Way Forward
While the compliance rating regime is likely to be rolled out only in the next financial year, these loopholes and gaps have pointed out by many stakeholders. Making these amends would not only facilitate better working of this provision, but would also ensure better compliance on the part of businesses and more effective enforcement on the part of the Revenue. However, the dust around this issue is far from being settled, given the lack of non-specification of parameters used for calculating this score. This would surely spring up another round of debate along with these pre-existing issues!
– Sri Janani Seenivasan & Krishna Ravishankar
