Decoding GST: How e-way bill can bring tax evasion to a screeching halt

With the first e-way bill rollout turning out to be a damp squib and being recalled eventually, there’s a lot riding on e-way bill’s redeployment. Here’s a look at the significance of e-way bill and why the invoice matching mechanism is key to battling tax evasion.

In a revelation that was both shocking and dismal, Finance Minister Arun Jaitley, in his Union Budget speech lashed out at tax evaders and brought to light the fact that out of 5.97 lakh companies which had filed returns for FY 2016-17, as many as 2.76 lakh companies showed losses or zero income.

The deployment of the e-way bill was intended to add the much-needed firepower to GST to crack down on tax evaders. However, lack of foresight and a shaky platform caused the GST network to crumble under the immense volume of transactions.

With the re-deployment of e-way bill, there’s a lot riding on its ability to meet the government’s estimate of accruing Rs 10,000 crore in monthly GST collections.

CIO India, in an interaction with Vinay Sethi, Head of Market Development for Global Tax, Thomson Reuters India, takes a deep dive into the e-way bill and why the invoice matching mechanism is of immense significance for CFOs and business leaders.

Edited excerpts:

What were the loopholes in the existing input tax credit system, and how did GST make the tax reporting system more transparent?

Input tax credit was a subjectivity-driven credit system. There were situations where organizations having purchased a service would claim input tax credit. However, the party that had sold the service had not deposited the same tax to the government.

And there was no way this fraud could be caught because there was nothing connecting these transactions to make it visible to the government. Simply put, businesses were run in silos. If a business was interacting with another business, there was no way for the government to know about the transaction – they had to rely on what was reported.

Also organizations were picked up for auditing on a random basis. For instance, out of a hundred transactions, only three were picked for audit.

“If there is a mismatch in billing or if there    is something wrong with the transaction, it can now be easily detected with a simple MIS report. In the previous tax regime, the government did not have the visibility on everything that was happening.”

With GST, the approach has changed from a reactive one to a more proactive one. The government has now put the onus on the buyer and the receiver to match the data between themselves.

So if there is a mismatch in billing or if there is something wrong with the transaction, it can now be easily detected with a simple MIS report. In the previous tax regime, the government did not have the visibility on everything that was happening.

But right now, all transactions have to go through one platform, irrespective of where the transaction happens.

Why did the government’s first attempt fail? What was the purpose of rolling out the new e-way bill?

GST was originally envisaged with the intent to file three main returns: GSTR-1, GSTR-2 and GSTR-3. GSTR-2 was intended to be the filing done after reconciliation of a seller and purchaser invoice.

Now since GSTR-2 did not see the light of the day, the reconciliation process was missing. So the government’s original plan to roll out GST in the manner it intended did not materialize.

In my opinion, bringing in another mechanism like the e-way bill to identify tax evaders was not necessary. The government is of the opinion that there are people who are trying to evade tax, and e-way bill is the government’s strategy to do just that.

Honest taxpayers have to take on the added responsibility of complying with the e-way bill – all because of a few people who intend to evade paying taxes.

Whether it’s going to be successful or not cannot be answered at this point in time – we’ll have to wait and watch. There has already been once false start so I don’t expect the second rollout to go wrong.  

Challenges in rolling out the e-way bill – do you think the immense volume of transactions – 3.5 billion a day, could be a challenge?

The GST platform was not prepared to support the humongous volume of transactions. But since the recall, developers got an additional 50-60 days to ensure that the platform doesn’t crash the second time around.

The technology requirement to run operations is pretty basic, but the challenge is more around the volume of transactions.

The current process of generating and filing the e-way bill is a far easier and abridged version of what can actually be done using technology.

Invoice matching is now the core element of GST. What do you think CFOs and business leaders need to watch out for; do you foresee any pitfalls in the process?

In my point of view, the most significant pain point is the invoice matching process. The entire concept of GST is banking on invoice matching.

“India’s rapid growth and embrace of technology has created some significant opportunities for FireEye, and I’m confident Shrikant will capitalize on this and help FireEye to expand the base of organizations we help protect in India.”

Vinay Sethi Thomson Reuters

Vinay Sethi, Head of Market Development for Global Tax, Thomson Reuters India

The good news is CFOs have bought into the concept and developed a mindset of ensuring invoice matching. It’s not only for compliance purposes, but also for the overall betterment of the business process.

A major benefit brought about by GST implementation is that organizations have now started believing that this is how businesses will be run in the future.

On the flip side, GSTR-2 has not been implemented and it doesn’t look like it will be in the near future. Invoice matching is the only way to ensure that tax evasion is minimized. This is very important for the long-term wellbeing of the country.

The invoice matching mechanism also reduces tax audits and assessments of corporates in the future, because you’re getting it right at base level.

In January this year, the Bombay High Court, while presiding over a petition, pointed out that the GST regime is not tax friendly and that GSTN is prone to disruptions. What are your views around this?

I have heard both sides of the story – from the corporates as well as from the GSTN. There is definitely merit in what the Bombay High Court has observed, and we know for a fact that the GST network is not functioning in the manner it should have.

But we need to bear in mind that the GSTN is working in a highly dynamic environment. It’s not easy to operate when mandates keep changing frequently.

What are the technological innovations in taxation, and how can they make the GST process seamless and transparent?

Historically taxation has been predominantly based on consultation and a lot of manual intervention. The field of taxation has been quite late in adopting emerging technologies, but over the past decade, technology has made a foray into taxation.

Taxation has always been an areas which has required constant regulatory changes and is always a priority item for new governments and economic reforms.

There’s an ongoing tussle between governments and tax payers – the government will always want to maximize its tax revenue, while corporations want to pay no more than their fair share of tax. Tax laws, by its very nature, are subjective and open to interpretation.

With emerging technologies making an entry into the area of taxation, a lot of ambiguity and subjectivity has been removed, thus making the taxation process a lot more transparent.

The advent of technology is making the taxation process a lot more seamless by reducing manual intervention in administration and inter-party dealings. Technology has been able to fill looming gaps in taxation.