Business have been focused on trying to ensure they are fully compliant with India’s GST regime and the constantly evolving rules, meaning that many tax executives have only recently paused to think about possible upcoming audits.
“I am a bit worried because we've recently filed our returns,” said Umang Dhingra, head of tax for India at GlaxoSmithKline Asia. “[We have to] appreciate that there are stiff targets ahead and there will be officers who will be coming to us.”
However, Samsuddha Majumder, tax partner at Trilegal, said the government needs to move away from a regime where independent tax officers have collection targets, because it creates an incentive for a local tax officer to reclassify inter-state sales as local sales to claim the revenue in their state.
“This is something that we have seen happening in the past, and this is going to continue with GST,” said Majumder. He explained that tax officers are reclassifying a large amount of incentives so that the local tax office benefits in a way that meets the revenue targets. “That takes away from the national nature of the GST,” said Majumder.
Majumder said he is already seeing instances of this through his firm’s clients. In many cases, the assessing officer requires tax to be paid in their state, but then tells the taxpayer to claim a GST refund after the payment is made. “This makes no sense in a national tax system,” he said.
For many large companies, the GST regime offered an opportunity to centralise indirect tax compliance, often at the Indian head office. However, Mohan Nusetti, vice president of indirect taxation at Lupin, warns that the audits that are going to happen will occur at the state level.
“There are going to be queries from each state,” Nusetti said, “and each tax officer interprets the law in their own manner.”
Each assessing officer is likely to ask questions in different ways and demand data in varying formats. This will increase the administrative burden on corporate tax departments that will have to deal with all the requirements of tax auditors across 29 states, which Nusetti described as “a massive challenge”.
“Ideally, the government should have thought that at least the audit process could have been standardised and done in one place,” Nusetti said. “I see this as a major hurdle in times to come.”
Taxpayers have suggested using the concept of a large taxpayer unit to enable audits in the headquarter jurisdiction in line with the government’s ease of doing business agenda.
“But now, looking at audits in multiple states and territories is a massive hurdle. For sure, technology can play a massive role because everything is driven by technology in GST,” said Nusetti. He noted that although compliance is done at a state level, the documents and compliance procedures are digital, potentially allowing an assessing officer to access documents from any location.
Manual fixes for technological ‘glitches’
Although the GST regime was supposed to be a technology-driven system, there are numerous malfunctions to deal with, and very few digital fixes.
“If you have a glitch in the system, you have to go to your local GST officer and go through an entire process of getting this changed,” Majumder said.
Using an example, the tax partner explained how a change in personnel can cause a significant compliance barrier.
“You have an authorised representative in a company, which is probably a director, who is the signatory for GST. He is fired or leaves on bad terms. However, there is nothing you can do [to comply with the GST] – you cannot file your returns until you can convince that person to give up their password,” Majumder said.
“If you go to the tax officer, they will tell you that you need to get the password from the authorised representative because they cannot change it at their end. This is clearly a glitch in the system, and you have to fix those glitches, because otherwise the taxpayer pays because he's not able to file the returns,” Majumder added.
Looking ahead, these issues can be held as an audit point against the taxpayer.
For Umang Dhingra, the concern is how much indirect tax audits will change under the new regime and how much weight audited documents will hold when then tax authority conducts its own audit.
“If you have put an audit obligation into place, is the tax officer bound by it? Are they actually going to rely on it, or are they going to start from scratch?” Dhingra asks.
If a tax officer begins an audit from scratch, he fears having an additional layer of compliance to deal with. However, he does note that this will be tested over time because litigation has already started with some taxpayers seeking advance rulings.
“The litigation started with refund claims being filed and rejected. So, the litigation has already started, but the real assessment and the real litigation is yet to be witnessed,” said Dhingra.
Nusetti said that with all the data available and documents having been audited by a certified auditor, the assessing tax officer should not be questioning this again. However, if an assessing officer is seeking additional data, then that is available because transaction level data is available to the government.
Avoid being ‘saddled with litigation’
One tax director at a multinational enterprise (MNE) said that policymakers and businesses must work together to make sure that “corporates don't get saddled with litigation”.
The tax director suggested that if there are five issues that keep coming up in several states, then efforts should be made to address them at a national level.
They said the country’s largest taxpayers just want to comply with the GST and they are not seeking to minimise their tax. As such, if the same issues keep recurring, rather than all of these issues going into appeal, a holistic approach should be taken. The government needs to ask itself how these issues can be resolved amicably.
“I think if that is done, then it will nip it [the recurring issues] in the bud and then set the stage for a framework where corporates can feel like while they're complying and they made some errors ofjudgment or omissions, there is a lenient view rather than a very punitive view being taken.”
Similar to Majumder’s call for tax targets to be abolished, the MNE tax director said a shift in the mind-set of policymakers would be beneficial, but it will not happen until the first tranche of audits are complete.
“The mind-set has to change,” agreed Dhingra. If not, he warned that in a decade or 15 years from now, the same discussion will be occurring. “We will be discussing a legacy dispute resolution scheme 2.0,” he said.
While companies prepare for the first wave of GST audits, tax executives need to be proactive, follow the developments and keep connected with their peers. Companies should use their time effectively to examine IT systems and streamline processes, but the tax authorities also need to be understanding of the difficulties and confusion taxpayers are dealing with.
