Tax Officers Will Sniff Out Evaders Under a Centralised GST Regime

In order to evade taxes in the GST regime, you will have to achieve collusion in the entire supply chain.

What will Goods and Services Tax (GST) actually achieve? It will achieve two things. First it will make it easier to do business across India with one tax regime. Second, it will make tax evasion very difficult.

Lets first look at the first and then at the second.

One tax regime means that on a particular good or service, the same tax rate will be charged across India. So if tax rate to be paid on sales of chocolates is x% in UP then it will also be x% in Tamil Nadu too.

GST makes it easier to do business by doing away with a host of indirect taxes such as central excise, VAT, octroi, etc. This is a good thing from the point of view of manufacturers, wholesalers and retailers.

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Why Tax Evasion Will Get Harder Under GST

With a host of different taxes at the level of Centre and states, movement and storage of goods across the length and breadth of India was difficult and not seamless. This increased the monetary and psychic costs of doing business.

Tax inspectors from different tax agencies would often inspect and obstruct the movement and storage of goods. By eliminating this multi-agency, multi-layer tax structure, GST is likely to increase ease of doing business in the country. The government hopes that this will translate into higher GDP growth. It may also translate into lower inflation with businesses transferring the resultant cost savings to customers in the form of lower prices.

Why will tax evasion become so difficult under GST regime? This regime creates an integrated central body through which all the GST taxes that are paid will be routed and recorded. This body is known as Goods and Sales Tax Network (GSTN). Suppose you are a retailer of white goods. White goods are electronic goods such as television or washing machines that find use in households.

You want to evade sales tax on television sets you sell. So you sell 100 television sets but pay sales tax (GST) on 80 sets. The GST network will find from its centralised database that the wholesaler which supplied you television sets paid GST for 100 television sets.

Every business will have a unique GST number in the GSTN. Taxes paid and goods sold by a business can be easily seen by feeding in its GST number in the database. And so the tax agency will come knocking at your door asking you to pay the sales tax for remaining 20 sets on which you have evaded taxes.

Now suppose both you and your wholesaler have colluded and the wholesaler too pays GST on 80 television sets instead of the 100 that it sold to you. In that case the centralised GSTN will again catch both of you because the manufacturer or supplier from which the wholesaler got the 100 televisions would be shown to have paid for 100 television sets (that it sold to the wholesaler) in the GST database.

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In order to successfully evade taxes in the GST regime, you will have to achieve collusion in the entire supply chain – right from the party that supplied the most basic raw material. GST is more about using technology to create a centralised database for all indirect taxpayers in the country.

Earlier there was no such database because different tax agencies at different levels collected different types of indirect taxes. So indirect tax evasion was much easier. Reconciliation of the taxes paid by different players in the supply chain of a product or service was extremely difficult.

Now under GST, with one centralised database, continuous reconciliation of taxes paid by different players in the supply chain of a good or service can be done.

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Data analytics is also likely to be done on a regular basis to identify those who are indulging in tax evasion. The government hopes that with lower tax evasion, indirect tax collection will go up. Higher revenues for the government, because of higher indirect tax collection, can be used to finance infrastructural projects and other government sponsored development schemes.

(The author is Founder and CEO of the Divya Himachal group and author of ‘Why India Needs the Presidential System’. This is a personal blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)