The Prime Minister is pushing for GST reforms before Diwali, urging states to adopt the shared draft. Concerns persist regarding unpredictable tax rates and overlapping investigations, leading to numerous demand notices. The article suggests rationalizing rates, expanding the tax base, and adopting a nuanced approach to compliance, including preventing non-compliance and supporting taxpayers.

Two days after announcing the plan to reform GST, the PM on Sunday said a draft of the next-generation changes has been shared with states and urged them to come on board, so the proposal can be rolled out before Diwali.

Even as GST remains a work in progress, some concerns persist-primary among them is the lack of certainty or predictability. Disputes over applicable tax rates, exemptions, input tax credit (ITC), or the taxability of certain supplies often surface without warning.

Investigations are often launched simultaneously by multiple authorities, bringing with them the usual rigmarole of summons, notices, seizures, frozen bank accounts and blocked ITC. To make matters worse, the system mechanically churns out thousands of demand notices, often triggered by what businesses consider ‘minor’ discrepancies or gaps in return filings.

In December 2023, GST authorities issued demand notices of around ₹1.45 lakh crore to around 1,500 businesses, citing inconsistencies in annual returns and ITC claims for FY18. There is cynicism over whether such a backlog can be resolved at the primary level fairly. In many cases, prolonged litigation is inevitable, heightening uncertainty for both revenue and trade, and overburdening the dispute-resolution system.

If GST is to live up to its promise as a ‘good and simple’ tax, its approach to dispute resolution needs a rethink. A multi-pronged strategy is essential-both to curb the creation of disputes and to resolve them fairly and promptly. A good starting point would be to rationalise the rate structure: compress the number of rates, eliminate rate inversions, and, where possible, apply broadband rates for similar products such as bread, buns, dinner rolls and parathas.

The timing is opportune, with revenue collections rising. Pairing rate compression with an expansion of the tax base-by bringing in at least some petroleum products, such as natural gas-could ease fears of revenue loss from lower rates or alternatively allow for a reduced standard rate.

GST administration must adopt a more nuanced approach to compliance. While aggressive enforcement is essential for tackling egregious offences such as fake invoicing, fraudulent input tax credit and outright tax evasion, other tools should be used to address less severe violations.

Compliance management entails bringing about a change in behaviour, which cannot be achieved solely through ‘entrapment’. There must also be an equally credible strategy to prevent non-compliance and support taxpayers, especially MSMEs, who do not intend to violate the law but are prone to make errors.

A convention of issuing periodic advisories to the trade, highlighting commonly occurring data errors, discrepancies, or other forms of non-compliance discovered during return scrutiny, audits or enforcement should be established. One major source of non-compliance is the incorrect availment of ITC. It may help to specify what ‘reasonable steps’ a taxpayer receiving goods or services should take to safeguard against allegations of evasion in this regard. Such provisions existed under the erstwhile central excise and service tax laws.

Contentious issues that arise during compliance verification should be clarified promptly to prevent further disputes. If a practice followed by the trade is found to be at odds with the intended interpretation of the law, such clarifications should, unless the practice involved suppression of information or mis-declaration, correct the practice without recovering tax for past periods beyond the normal limitation period.

The taxpayer also needs to take responsibility and collaborate-for instance, by ensuring that their return data is accurate, consistent and foolproof in a digitalised environment, lest the hands-free risk-management system flag gaps and discrepancies that could trigger disputes. Greater attention to data quality and consistency by the trade could make the ‘flurry’ of demand notices a thing of the past. They should also utilise the legal provisions for voluntary compliance as needed to prevent protracted disputes and litigation.

The creation of a national e-platform to host live data on issues or cases where either the central or state administration has initiated an investigation would help prevent taxpayers from being subjected to multiple authorities. The recent announcement that GST audits in certain challenging sectors will be conducted jointly by both authorities would also serve the same purpose.

The most challenging task is to instil and enforce a sense of fairness and timeliness among officers handling disputes. It is not as if norms of conduct to prevent high-handedness are absent. Perhaps the language of such instructions is followed in form, but owing to a lack of ownership and conviction, as well as a tendency to play it safe, the outcomes often fail to inspire confidence in the system.

There is no censure for such behaviour, just as there is no reward for resolving disputes constructively and reasonably. Continuous training and re-skilling of officers in dispute resolution, coupled with an appropriate incentive structure to promote reasonableness, would be an important way to reorient this critical business process.

The writer is former chairman, Central Board of Indirect Taxes and Customs (CBIC). Views are personal.