Whether we like it or not, students get rated in their academics through a GPA score, products get rated on energy efficiency, business for credit worthiness, etc. GST compliance rating is indeed a novel idea, even before GST is implemented in India.
GST Compliance Rating is meant to be a measure of how compliant a business is with reference to his GST obligations. The scoring scale can be a point based system from 1 to 10 where1 is the lowest rank and 10 is the best rank. These ratings will be made public on GST network which would bring in transparency and influence the non-compliant to become more compliant. The objective being to shift the business culture and practices from evasion and avoidance to a willing compliance and getting recognized in public for good tax behavior. A rating of 10 to be one of pride and good public credibility.
GST Compliance Rating parameters are yet to be notified. The indications are that there would be the following parameters on which someone could be rated under GST
- Timely payment of Taxes
- Timely Filing of Returns
- Timely reconciliations – Between Sellers and Buyers reported data on GSTN.
- Prompt uploading of Invoices
- Timely submission of GST audit report
- Timeliness in adhering to other provisions of the Act
- Timeliness in responding to GST authorities
Benefits of a High Compliance Rating for fully compliant vendors are as follows:
- Purchaser gets input tax credit immediately which helps him manage working capital better. Any unreconciled transactions can lead to blocking of working capital.
- Get refunds immediately. It can be prescribed that someone with a minimum rating of 5 alone can claim the refund. This would be a huge welcome to export-driven business as the input credit would be a refund claim and timely refunds will be a paradigm shift with the current practice of refund claims in Service Tax.
- The expectation is that Sellers with a good rating will be able to command a higher standing and consequently more business. However, this would need to be validated empirically, as the economy is making a transformational shift from a non – compliant to compliant businesses, as also the 4 sets of GST rates and how this would impact the respective business players would also influence whether higher standing would result in higher revenues is to be seen.
- The government may provide that a vendor with a compliance rating of 8-10 for a specified period of time may get a 5% tax rebate at the end of the year which would be an incentive to the vendor.
Benefits to Government are as under:
- Increased and timely tax collections.
- Exception-based scrutiny which would reduce time and effort for Departmental authorities. For example – It may be prescribed that a vendor with ratings of say 8-10 would be subjected to GST departmental audit every 3 years instead of a vendor with ratings of 1-5 who may be subjected to Departmental audit every year.
The benefit of Investors are as follows:
- A company with a high compliance rating can disclose the same in the annual report which will enhance shareholder value.
- Reduction of Tax litigation and disputes
Blacklisting of Dealers with a low credit rating can be done based on some of the following parameters though they are yet to be notified
- Default in filing the tax returns for a continuous period of 3 months
- Short payment of taxes for a period of 3 months
- Not responding to GST authorities on time for 3 or more times.
It may also be prescribed on the GSTN website that purchasers should not purchase products from Blacklisted dealers whose names could be displayed on the GSTN website. In extreme cases, it may be prescribed that if a blacklisted dealer does not become fully compliant with 6 months of blacklisting his registration under the GST laws may be canceled.
Some of the disadvantages of a compliance rating scheme are as follows:
- The bigger players in the market would be able to adapt to the system faster compared to the smaller players in the market who may have financial constraints in terms of engaging consultants.
- In the initial stages, the business may be prone to errors and delays which may impact the ratings and consequently the business.
- Apprehension may also develop in the business as to whether other stakeholders may take some action based on a low compliance rating. e.g – Banks may reduce the credit limits for borrowers with a lower compliance rating.
This being a new concept, every taxable person should be aware while dealing with a blacklisted vendor since the input tax credit would not be available to purchasers dealing with blacklisted vendors. Compliance Rating would also bring in increased transparency in the interaction between the taxpayers, the government, and the investors. Some of the unanswered questions which we must wait and watch are
- In terms of ease of doing business in 2016-17, India is ranked by the World Bank at 130 in the survey and in terms of paying taxes and enforcing contracts it is ranked at 172. Can GST Compliance rating facilitate India’s rank in terms of ease of doing business to the 90th rank by 2017-18 and 30th by 2020 which is what the government has targeted?
- India ‘s tax to GDP ratio at about 17% is considerably lower compared to some of the other emerging markets. Can GST compliance rating help improve this ratio?
- Can GST Compliance rating improve India’s Sovereign rating by S&P which has remained the same since 2014 as “Stable”? Shouldn’t we as a country aspire to be better?
It is recommended that the Government incentivizes higher compliance with a progressive scale of GST duty drawback or refund of say 10% for a rating of 10, 7.5% for a rating of 9 and 5% for a rating of 8.
GST rating as a concept is very welcome, although it is early days in GST implementation and the modalities would be eagerly awaited. This may perhaps be amongst the path-breaking the concept of making tax compliance information of business a matter of public domain.
Also read, GST implementation: Good, but not yet simple