Around the globe, whenever new tax system is introduced there are always conflicts between Taxpayers and the revenue authorities. The Government wants its revenue to be as high as possible and for that it regularly amends the tax law to curb the novel tax resorts used by the taxpayers. Due to economic, social and political reasons a Governments have to grant a few tax exemptions, deductions, abatements and rebates which is usually mis-utilised by other sectors who does not fall in its ambit.
Taxpayers wants their tax liabilities to be as low as possible and thereby resort to three mechanisms which are Tax Planning, Tax Avoidance and Tax evasion. Tax evasion is illegal and results into hefty penalties. Drawing a line between acceptable and unacceptable tax avoidance depends on the tax laws of the country and its jurisprudence, thereby there is no single rule across different jurisdictions to distinguish between the two.
In fact in case of McDowell & Co. Ltd vs CTO, Honorable Apex Court of the country said that “Tax planning maybe legitimate if it is within the framework of law, but colorable devices cannot be part of tax planning. It is wrong to say that it is honorable to avoid payment of tax by dubious methods. It is obligation of every citizen to pay tax honestly without resorting to subterfuges.”
In this article we intend to identify various mechanism of tax-lowering in India on account of GST and would leave it to fine sense of readers to ascertain whether such method is tax planning, avoidance or evasion.
Menace of fake invoices
Fake invoices have become a popular term in last one year, however actual meaning of this is unknown to many. Fake invoices basically mean issuance of an invoice without any underlying supply of goods or services. Issuance of fake invoices (also known as dabba invoices) are commonly seen for goods which are supplied to retail customers not claiming any tax credit.
Till date tax authorities have zeroed in on fake invoices of cement, steel, high-value luxury bags and clothes, beauty products, papers, high-cost electronic items like IPhone, IPad etc. and hospitality services including banqueting.
Earlier invoice wise matching was proposed under GST regime, however due to technology challenges this proposal was not implemented and thereby gave an entry to the tax evaders in the supply chain.
It is continuously found by the taxing authorities that registered persons are buying fake invoices through an agent, who is accountable for finding such suppliers and also ensuring smooth flow of cash in the chain. Fake invoices is a double whammy as it reduces GST collections and also have an immediate impact on direct tax collections.
Section 17 (5) of GST law states that; Input tax credit shall not be available in respect of the goods or services or both received by a taxable person for construction of an immovable property on his own account including when such goods or services or both are used in the course or furtherance of business subject to the condition that such construction expenses are capitalised, to the said immovable property.
There is no monetary limit guiding the capitalisation of an expense and it is left to the taxable person to decide the same in the light of applicable Accounting Standards. Now what has been done by the taxable persons is that they are not capitalising the amounts in their books and are claiming the GST paid as Input Tax Credit.
In the erstwhile regime of VAT and Excise both tax credit on account of any civil construction was not allowed and thereby it always formed part of the cost of the company. However, taxpayers are now using the technical loophole in GST regime to claim additional tax credit which results into colossal loss for the exchequer.
Concept of E-way Bill was introduced by the Government to keep a check on Tax evasion and made applicable only on the motorized vehicles. E-way bill is an online generated document required by the person in charge (“PIC”) of the transportation for the movement of goods. As the E-way bill was applicable only on motorized vehicles the traders found a different way to evade GST. Some of them are now using Horse-carts, Bullock carts or manual carts to transport goods across smaller distances.
Some of the traders who intend to work under radar are now using railways to evade taxes. Unlike goods moving through road transport which is being stopped in midway, there are virtually no checks in case of railways and making it easier for the supplier to supply goods on a rail network without using an E-way Bill.
Chances of tax evasion on rail network would be high till the time there is seamless flow of data from servers of Indian Railways to GSTN.
Round-tripping is a mechanism whereby a transporter uses the same set of documents multiple times for transportation of different consignments. Post E-way bill introduction this modus operandi has been limited but is still not eliminated altogether.
Let us take an example: Goods which are transported from Delhi to Gurgaon distance of which is less than 100 Kms. E-way would have a validity of 1 day, which is sufficient for 3-4 round trips on the same vehicle.
Every round trip leads to a tax evasion of full load picked up the vehicle. Checking of such round tripping in difficult task without implementation of PAN India Fast-tag system on all nationational and state highways.
Nowadays Hospitality industry generally gets its revenue through Online Travel Agents (OTAs) such as Booking.com, MakeMyTrip, TripAdvisor etc. Guests book their accommodation through OTAs and pay an amount to OTAs directly and OTAs pay booking amount to Hotels after deducting their commission. Now what some Hotels are doing is that they book the revenue in their books of accounts on net basis i.e. Gross booking amount less commission paid to OTA and pay GST on that net amount, instead booking and paying tax on gross amount.
Net effect of this transaction is that Government does not get GST to the extent of commission paid to the OTAs, which in several cases would be as high as 25% of the top line. Many a times this reduction of OTA commission also results in lowering of tax brackets.
For ex: If the applicable tariff of a hotel room booked through OTA is INR 7,600/- and 20% of the booking amount is charged by OTA as a commission. Then the total amount of revenue booked by the hotel is INR 6,080/- (i.e. INR 7600-1520 being commission amount of OTA) and the rate charged is 18%. Which principally should have been 28% due to tariff falling in the slab of INR 7,500/- and above.
Tax Rates wrongly charged
Frequent changes and multiple rates have become an easy way to evade tax in GST regime. There are many entries in Tax rate schedule where the rate of tax depends on the price of a commodity like in case of clothing, footwear etc. In these industries retailers are artificially vivisecting the invoice value into two or more components to claim tax advantages.
For Ex. One suit that cost more than INR 1,200/- is liable to 12% rate of GST. However, if that suit is broken into two parts (Coat and trousers) of INR 600 each then tax rate is only 5%. This mechanism of splitting the invoice value often results into a loss for the tax authorities.
In other case of solar power projects the tax avoidance is seen by tax authorities. Solar power generating systems (SPGS) are taxed at the rate of 5% and other supplies are to be taxed at the rate of 18%, but technically law does not define SPGS.
Thereby such companies have entered into two separate contracts artificially splitting the value of contract between SPGS and services on installation. They pay tax @ 5% on Equipment part and remaining value is taxed @18%. Two rulings of Maharashtra Authority of Advance Ruling has stated that such artificial division of a single contract is against the GST regime and the entire contract needs to be taxed @18%.
This mechanism of tax avoidance is very difficult to identify and track in real-time due to its non-conspicuous nature, even though it could pegged as one of the most polished form of tax lowering.
Notice pay recovery/early exit pay
Generally companies have an agreement with their employees regarding notice period to be served in the event of their exit from the organization. However there is always a clause that outgoing employees may leave the organization early after paying a certain amount called Notice Pay. Department is of the view that GST is applicable on such Notice pay recoveries and thereby they have issued notices to several MNC companies on this point.
Corporate are of the view that there is no underlying principle of supply in this case and thereby no GST is applicable. We will see the fate of this litigation once the matter reaches higher courts in India.
Till then department will say that it is tax evasion and taxpayers would say that it is tax terrorism.
On January 4, 2019 Minister of State for finance Mr. Shiv Pratap Shukla in a written reply to the Rajya Sabha said that during the period April 2018 to December 2018, total 8917 cases of tax evasion of central excise, service tax and GST were detected involving a massive amount of INR 48,000 crores.
Of this, investigations in 3626 cases of GST evasion was initiated by the Government and on the basis of investigation, amount of GST evaded estimated to be over INR 15,000 crores out of which close to INR 10,000 crores was recovered by the Government. By reading above methods anyone would appreciate the innovation and courage of an Indian mind to evade taxes in broad daylight.
In majority of the cases tax evasion is due to errors in drafting of GST law and loopholes plugging in. Law in its nascent stage and needs to be repaired by way of amendments, notifications and clarifications. Further Government should consider rationalizing the “multiple GST rates applying on a single product” into a single rate so that tax avoidances through breaking up of the invoices is not possible.
We also believe that a comprehensive IT network wherein there is free flow of data across all national data centers including GSTN, Eway bill, licensing, Fast-tag, local registrar, CPC-direct taxes , Aadhaar, Passport may go a long way in creating and building a tax evasion free environment.
The author is Partner, AMRG & Associates. The views expressed are the author’s own.