Actioning trust to generate sustainable revenue

Moreover, as seen in the graph, the number of taxpayers under the composition scheme has reduced over the last four years.

One of the primary reasons for the scheme not drawing more businesses is the limitation in the business territory – that is to say, composition taxpayers are barred from carrying out inter-state transactions. Also, in the past, composition dealers were not permitted to make supplies to e-commerce operators. A welcome step is that pursuant to the 47th GST Council meeting in June 2022, composition dealers have been allowed to make supplies through e-commerce operators. However, these small businesses are still not permitted to undertake inter-state supplies. Freeing them of this territorial constraint would enable a huge number of small businesses to leverage the advantages of the digital economy and to have access to a wider market both domestically as well as globally, especially with the emergence of India’s own platform, Open Network for Digital Commerce (ONDC). 

Also, the turnover limit for the composition scheme, which was last revised in 2019, may be revisited and enhanced in line with the turnover limit of presumptive taxation for small businesses under income tax – i.e. INR 200 lakh – so as to broadly align the two schemes. In the service sector, the composition scheme provides a turnover limit of INR 50 lakh per annum with a GST rate of 6%. Given the pace of growth in the service sector in the micro, small and medium enterprises (MSME) category, perhaps this limit for service sector providers could also be revisited and suitably increased.

The compliance burden under GST may be reduced for small taxpayers by redesigning schemes such as the Quarterly Returns Monthly Payment (QRMP) Scheme. Under the QRMP scheme, the registered taxpayer having an aggregate turnover of up to INR 500 lakh in the previous financial year is required to file quarterly returns instead of monthly returns. However, they are required to make tax payments on a monthly basis. 

Taxpayers under this scheme also have an option to report, in lieu of quarterly reporting, invoices using the Invoice Furnishing Facility (IFF) on a monthly basis. This enables them to pass on the input tax credit (ITC) by way of the data flowing from the IFF into their buyers’ returns. This monthly filing adds to the compliance burden on small taxpayers. 

Once the e-invoicing facility is extended to all transactions, including B2C, an option may be given to QRMP taxpayers to adopt e-invoicing. Using this data, GSTN can auto-populate the recipient’s GSTR-2A/2B to enable seamless ITC flow. This will help eliminate the need for filing IFF, which would enhance the ease of doing business for MSMEs. Also, the periodicity of tax returns under this scheme may be revised to annual or half-yearly instead of quarterly so that it reduces the compliance burden to a large extent.

Such redesigned schemes could:

• enhance the ease of doing business

• reduce compliance cost and time for small taxpayers 

• enhance voluntary compliance in the MSME sector.

The last-mile GST issues on non-compliance at the B2C level are a matter of concern for all tax administrations, as they lead to tax evasion. One scheme often adopted to counter this is the VAT/GST lottery. Such a scheme was first introduced by Taiwan in the 1950s. Many other countries introduced various types of prizes including cash prizes (the Philippines) and in-kind prizes like cars (Poland) and the chance of appearing on a television show (Slovakia).^[23]

The Kerala state government recently introduced the Lucky Bill App^[24] under the GST regime which encourages consumers to upload GST invoices by giving them prizes such as vouchers for stay in Kerala State Tourism Development Corporation hotels. The data from such apps can be leveraged to detect evasion of GST in the last mile. Schemes such as these, if introduced across the country, can incentivise vigilant consumers to ask for a GST bill, while acting as a deterrent to potential tax evaders.

Considering the high level of tax litigation in India and staggering pendency of cases in various appellate forums, a growing view is that there needs to be some sort of a mediation mechanism to resolve tax disputes –before such issues even arise. The essence of the mediation mechanism is to involve a third party (mediator) – an independent expert who helps the parties to develop a certain agreement on the dispute – while the parties fully control the decision-making process on the settlement of the dispute and conditions for its resolution.^[27]

Mediation of tax disputes is already being practiced in various countries. Jurisdictions like the US, the UK, the Netherlands and Belgium have adopted mediation as a viable alternative dispute resolution mechanism for tax disputes. In fact, even the Indian Supreme Court, in a recent judgment,^[28] has impressed upon the Parliament to enact a separate Indian Mediation Act that can comprehensively deal with civil disputes. Pursuant to this, a Draft Mediation Bill,^[29] 2021, was placed before the Rajya Sabha in December 2021, proposing that civil or commercial disputes be settled through mediation before approaching any court/tribunal. While the Draft Mediation Bill 2021 seeks to exclude tax disputes, the Government could consider carving out an exception and introducing a separate mediation process to resolve tax disputes by codifying a mediation framework within the tax law itself.

The proposed scheme of mediation could be implemented by the constitution of a mediation panel that is empowered (in the same way as the existing DRC) to resolve tax disputes, along with the constitution of an expert panel of mediators that may comprise of retired tribunal members/IRS officers, experienced chartered accountants and lawyers. The scheme would be optional, and would allow the taxpayer to withdraw at any time to pursue regular appellate channels. In the first instance, such a scheme could be introduced for resolving transfer pricing (TP) disputes. Later, with the help of experience gained, it could be extended to other categories of disputes.

The TP litigation environment in India has evolved over the years. Since the introduction of the TP regime in 2001, TP adjustments have increased significantly year on year, touching a peak of INR 70,000 crore in FY 2013–14.^[30] While the quantum of TP adjustments may have reduced since FY 2013–14, India continues to remain among the most litigious TP regimes in the world. Further, a majority of the appeals (72%) on TP matters filed before the tribunals are by taxpayers and have a high success rate, with 82% of the taxpayers’ appeals being allowed or partly allowed in their favour. On the other hand, 61% of the tax department’s appeals have been dismissed.

Internationally, TP audits are generally independent proceedings that are handled by expert TP teams. Cases are selected for audit based on identified high-risk parameters. Moreover, once a case is selected for a TP audit, the relevant transactions or arrangements are examined for many years in one go.

To resolve the issues mentioned above and better align TP practices in India with those followed globally, TP audits should be delinked from regular assessment proceedings. Accordingly, TP would be an entirely different vertical, having its own system of risk-based case selection for audit, an audit process that is entirely independent of the regular assessment proceedings, and a separate and parallel appellate channel.

Further, the existing dispute resolution panel should be replaced with a mediation panel (mentioned above) which will deal solely with TP issues. The amicable settlement of TP disputes via mediation will:

• significantly reduce protracted TP litigation

• promote a relationship of trust with the tax department 

• positively influence India’s Ease of Doing Business index.

Further, in line with the global best practices followed by many developed countries such as the US, Germany, Australia and many other European countries, block audits covering a period of three to five years should be considered for TP cases.

Although GST in India has completed five years, the proposed GST Appellate Tribunal envisaged to render prompt and effective remedy to aggrieved taxpayers is yet to be established. Meanwhile, appeals to be taken up by this appellate forum are mounting across India. Even as the tribunal is being launched, the huge backlog of cases could virtually choke the system, enormously delaying current and future appeals. As a result of huge delays in delivering verdicts, taxpayers may become distrustful towards the appellate machinery. Hence, proactive steps must be taken to ensure that the appellate system is well-equipped to accommodate the considerable volume of appeals in the future.

In order to reduce the backlog, a potential way out is to provide a tailored amnesty scheme for those who wish to pay a fixed portion of the disputed tax amount under litigation, but can still be eligible to claim credit for the tax so paid. Also, a monetary threshold limit may be fixed for GST cases, below which no litigation would be initiated by the tax department in appellate forums such as the Commissioner (Appeals)/tribunals or high courts or the Supreme Court. Further, given the success of online hearings in the post-pandemic era, virtual hearings may also be permitted under law for proceedings in the proposed GST Appellate Tribunal.

The rising number of tax disputes, high-pitched assessments and indiscriminate penalties have cost the tax administration dearly in terms of taxpayer trust. At the same time, a much greater level of uncertainty has been imposed on taxpayers through a slew of anti-avoidance and compliance measures including, but not limited to, general anti-avoidance rules in domestic legislation as well as in tax treaties. In order to change the taxpayer’s perception towards the tax department and impart greater tax certainty (particularly to large investors), a more comprehensive and holistic approach to compliance is needed in India. This approach can be built around the co-operative compliance model that is being explored and implemented in several parts of the world.

Co-operative compliance is an expansion of the risk-based approach to tax compliance. It envisages ongoing and real-time cooperation between taxpayers and the tax authorities, which would result in the payment of correct taxes on time – in an effective and efficient manner. The model is based on the premise that the taxpayer can be trusted and the tax administration acts predictably, thereby providing tax certainty. Operationally, the underlying assumption is that if the taxpayer is transparent and able to demonstrate how she/he is making bona fide efforts to fulfil her/his tax obligations, the tax administration will not only guide the taxpayer on the manner of compliance expected but will also provide certainty in advance regarding a tax position. The tax administration expects taxpayers to give them access to their control systems used to manage tax risks. If satisfied with the control systems, the tax administration adopts a light-touch compliance regime to the eligible taxpayers. This can potentially lead to the speeding up of assessment processes and thus faster resolution of uncertain positions. At the least, it would lead to an enhanced relationship with the largest taxpayers based on mutual trust and understanding, real-time information and more efficient use of resources.

The OECD’s 2013 report on the Co-operative Compliance Framework (CCF)^[31] – based on surveys from 21 member countries of the Forum on Tax Administrations and consultations with business – concluded that the CCF can become an important tool for building tax certainty and driving trust-based voluntary compliance. The OECD termed this concept as ‘transparency in exchange for certainty’. The OECD also published another report on the subject in 2016,^[32] providing guidance for businesses on the design and operation of tax control frameworks (TCF) and tax administration on adjustment of their risk management strategies for large enterprises under co-operative compliance. 

Many countries have implemented or piloted the co-operative compliance model. To some extent, the Indian Government has been quite active in adopting measures that can fall within the ambit of co-operative compliance. To further augment the CCF, which is in consonance with the objectives of fostering voluntary compliance by reposing trust in the taxpayer, a high-level committee may be tasked with examining the co-operative compliance models being run in different countries and developing a CCF that is feasible and in tune with the current needs of the Indian tax system. The model can be formalised by publishing explicit frameworks explaining how the arrangement would work and individual agreements between taxpayers and tax administrations that specify the expectations and outcomes. Since these frameworks would require taxpayers to establish internal control systems that can effectively identify and manage tax risks, a CCF would typically be open to the largest taxpayers, on a purely voluntary basis. The model eventually implemented could cater to compliance – under both direct as well as indirect tax laws. 

On a similar note, a risk-based, targeted audit in GST would help the tax administration to adopt the least-intrusive strategy, engender trust and foster voluntary compliance. Further, when risk-based approaches are in place, businesses are likely to improve their internal controls to manage tax risks. Thus, it would be appropriate for GST administrations – especially at the state level – to uniformly adopt data-driven risk-based audit methods in their journey towards building a CCF.

As tax analytical tools are implemented for data collection, data forecasting, effective management of assessments/appeals and behavioural trends, it is likely that artificial intelligence (AI) will be a vital part of the tax function in the future.

It is worth adopting newer approaches such as design thinking and user experience to simplify complicated rules and procedures and provide a better taxpayer experience. Further, the Government may explore blockchain technology for e-invoicing, e-registration, e-payments, e-filing, e-assessment and e-audit. Countries like China are already using blockchain to detect fake VAT invoicing.

• Measures to address working capital issues

Under the GST regime, ITC balances (viz. CGST, SGST and IGST) are required to be maintained at state level. Therefore, companies having GST registrations in multiple states are not allowed to adjust the ITC balance of one state with the GST liability of other states, resulting in an additional burden on cash liquidity. The Government may consider at least allowing the CGST and IGST credit balances to be maintained at a national level so as to allow cross-utilisation of ITC balances between units having the same PAN, similar to recently introduced inter-state transfer of cash balances.

In addition to the above, the Government may also consider introducing a well-integrated model for cross-utilisation of direct and indirect taxes at the Central level. For instance, one possible measure could be adjustment of excess GST paid or ITC against the liability of income tax or basic custom duty. This would help taxpayers to optimise their working capital.

• Group registration under GST

In India, GST registration is mandatory in each state of operation, which has resulted in multiple return filings, huge cash flow impact and higher compliance burden for businesses that have pan-India presence. Ever since the introduction of GST, the industry has been seeking ways to ease this regulatory compliance burden. A few countries like Australia allow large businesses to take a group GST registration. The Government may consider exploring such a facility in India, which will help businesses having pan-India entities. Such entities could be permitted under law to submit a common GST return, resulting in lower compliance costs and improved cash flows.

• Aligning valuations under TP and customs

Often, it is seen that while there is data sharing between the TP and customs authorities, the stand taken by either of these authorities could adversely affect the taxpayer under the same factual circumstances. The Government may consider implementing a collaborative administrative framework for TP and customs with respect to the import of goods from related parties. Such robust collaboration has been functioning in many countries such as South Korea, where along with the advance pricing agreement (APA), there is a consultative facility of Advanced Customs Valuation Arrangement (ACVA) to help the taxpayer arrive at a valuation which can be mutually accepted by the tax as well as customs authorities.

Tax transparency reports filed voluntarily by businesses, together with concerted efforts by the tax administration to show how taxes paid by citizens are being used to promote the welfare and development of people, would go a long way in enhancing the element of trust and pride in paying tax.

A well-designed non-onerous tax transparency framework on tax metrics, such as effective tax rate (ETR) and tax management practices that are voluntary for reporting by businesses, would create more awareness about the tax behaviour of organisations and also provide indicative inputs to regulatory bodies. The continuous review of voluntary disclosures would also help in building trust in respect of tax behaviour of businesses. In addition, a comparative assessment of the peer group could prompt outliers to explain their positions in their voluntary disclosures.

The Government can consider introducing a tax transparency framework on a voluntary basis in line with the Global Reporting Initiative (GRI) 207 tax standard for businesses having a material presence in India. These businesses can set a precedent by reporting relevant information in a consistent and uniform manner for better comparability, transparency, trust and relationships with stakeholders.
Using technology the Government could disseminate to the individual taxpayer targeted information on good work being done in the area where such a taxpayer live. For example, if a road is being built passing through the city of a taxpayer, it would be good to share the progress on that project with them at a reasonable frequency in order to reinforce the association of payment of taxes with the experience of tangible benefits.