The Finance Ministry should identify high-risk taxpayers in the GST composition scheme, as urged by the CAG. This recommendation highlights the need for stricter monitoring to prevent potential revenue leakage.
CAG Recommends Enhanced Monitoring of High-Risk Taxpayers in GST Composition Scheme
The Comptroller and Auditor General (CAG) has issued a significant recommendation urging the Finance Ministry to implement a more rigorous approach in monitoring taxpayers under the Goods and Services Tax (GST) composition scheme. This recommendation comes as a result of a detailed analysis of taxpayer data that uncovered substantial risks of tax evasion, particularly among high-risk taxpayers who may be exceeding the turnover threshold for the composition levy scheme (CLS).
The Finance Ministry should identify high-risk taxpayers in the GST composition scheme, as urged by the CAG. This recommendation is vital for protecting government revenue and ensuring that the GST system functions effectively.”
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Why the Finance Ministry Should Identify High-Risk Taxpayers in GST Composition Scheme:
“The GST composition scheme is designed to simplify tax compliance for small businesses. However, without proper oversight, it could be exploited by high-risk taxpayers, leading to significant revenue losses for the government.”
CAG’s Recommendations on Identifying High-Risk Taxpayers in GST Scheme:
“The CAG has recommended that the Finance Ministry should identify high-risk taxpayers in the GST composition scheme by utilizing advanced data analytics and risk assessment tools. This approach will help the government to flag potential risks and take necessary actions.”
Steps for the Finance Ministry to Identify High-Risk Taxpayers:
“The Finance Ministry should implement a robust strategy that includes regular audits, cross-referencing tax data, and leveraging technology to identify discrepancies in the GST composition scheme.”
Impact of Not Identifying High-Risk Taxpayers in GST Composition Scheme:
“Failing to identify high-risk taxpayers in the GST composition scheme can lead to widespread misuse, resulting in a substantial loss of revenue and undermining the fairness of the tax system.”
The CAG’s audit, which examined data from 8.66 lakh composition taxpayers under central jurisdiction during the 2019-20 to 2021-22 fiscal years, revealed alarming trends. A significant number of taxpayers were identified as being at high risk of exceeding the turnover threshold for the composition scheme. These taxpayers were identified using a combination of data from GST returns, such as GSTR-4A and GSTR-7, and additional information from third-party sources like income tax (IT) returns and the ‘Vahan’ database, which tracks vehicle registrations.
The audit found that many of these high-risk taxpayers might be under-declaring their ‘value of outward supply’ to remain within the turnover limit and continue availing the benefits of the composition scheme. This under-declaration presents a significant risk to the integrity of the GST system, as it allows ineligible businesses to pay less tax than they owe.
Key Risk Areas Highlighted
The CAG highlighted two major risk areas concerning taxpayers under the composition scheme:
- Under-Declaration of Sales: The audit found that some taxpayers were deliberately under-declaring their sales figures to remain eligible for the composition scheme. By doing so, they avoid paying the full GST applicable to their actual turnover, resulting in potential revenue loss for the government.
- Failure to Meet Eligibility Conditions: The audit also uncovered instances where taxpayers continued to participate in the composition scheme despite not meeting the prescribed eligibility criteria. This includes businesses that have surpassed the turnover threshold but continue to pay the reduced composition tax rate instead of the full GST rate.
Additionally, the audit noted that many composition taxpayers were not fulfilling their obligations to file returns and pay taxes under the reverse charge mechanism, further exacerbating the risk of tax evasion.
CAG’s Recommendations to the Finance Ministry
In light of these findings, the CAG has recommended that the Finance Ministry adopt a more proactive and risk-based approach to identifying and monitoring high-risk taxpayers under the GST composition scheme. The ministry is urged to regularly identify such taxpayers using a risk-based approach and to verify their declared sales figures using additional sources of data, including third-party information.
The CAG’s report emphasized the importance of cross-verifying the declared value of outward supply with other data sources to minimize the possibility of misuse by ineligible persons. This approach would help ensure that only those businesses genuinely eligible for the composition scheme are able to benefit from it.
Conclusion
The CAG’s findings and recommendations highlight the need for stronger oversight and monitoring of the GST composition scheme to prevent tax evasion and ensure that the benefits of the scheme are only availed by eligible taxpayers. By implementing these recommendations, the Finance Ministry can help safeguard the integrity of the GST system and protect government revenue.
The report has been tabled in Parliament, and it remains to be seen how the Finance Ministry will respond to these recommendations and whether it will take the necessary steps to address the identified risks.