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Compliance Rating Score under GST - a new era of certification

JUNE 29, 2017

By Rajshree Lohia, Advocate, Taxpert Professionals

THE Goods and Services Tax ("GST") regime, introduces a fresh concept of compliance rating score to be attributed to taxpayers based on such parameters as may be prescribed which may be how punctual or accurate they are in filing their returns etc. The scheme has been newly introduced under the Central GST Act, 2017 (hereinafter referred as the "Act"), and did not find reference in the existing indirect tax system. Akin to the credit rating score provided by Credit Information Bureau (India) Limited ("CIBIL") indicating a borrower's credit worthiness, a compliance rating score would be issued to the taxpayers under the new indirect tax regime depicting how compliant they are in respect of paying their taxes and filing returns.

According to Section 149 of the Act, taxpayers registered under the regime would be assigned a rating, based on how promptly they upload invoices, pay taxes and file returns etc.The provision has mutatis mutandis applicability in the Integrated GST Act, 2017 as well as the Union Territories GST Act, 2017. Section 149 of the Act reads as follows,

"(1) Every registered person may be assigned a goods and services tax compliance rating score by the Government based on his record of compliance with the provisions of this Act.

(2) The goods and services tax compliance rating score may be determined on the basis of such parameters as may be prescribed.

(3) The goods and services tax compliance rating score may be updated at periodic intervals and intimated to the registered person and also placed in the public domain in such manner as may be prescribed."

Such rating will be intimated to the taxpayer and made public on the GST Network (GSTN) website. It shall be periodically updated and help taxpayers make informed decisions while purchasing goods or services. Irrespective of the nature of its business, quantum of supply or turnover, every person registered under the Act will be assigned a GST compliance rating score based on his record of compliance.The provision reflects the idea of the tax authorities to build peer pressure amongst companies to ensure compliance.

The exact parameters for calculation of the said rating are still uncertain as they have not yetbeen notified by the Government. The Chief Executive of GSTN, in an interview, had stated that regularity in uploading the invoices, filing of returns and taxes would be the main criterion for assigning such rating. Other factors which would be considered are namely, matching of outward and inward supply transactions, transparency in reconciliations, co-operation with GST Department, amongst others. It can be rightly concluded that the sine qua non of such compliance rating is the proper filing of taxes and returns.

A compliant taxable person with a higher rating entitles itself to certain privileges, whereas on the flip side a lower rating may call for enhanced scrutiny. The probability for inspection and inquiry will ascend for suppliers with ratings lower than the prescribed limit.

Since,a considerable amount of the foundation of the GST regime is built on compliance, such rating shall have a huge significance in the decision making process while selecting suppliers for purchasing its inputs. A supplier not being compliant may also put its counter-part purchaser at a disadvantageous position, as the matching of returns would be disrupted leading to a delay in Input Tax Credit ("ITC"). For instance, a distributor procuring goods from a supplier would not be able to claim ITC for the taxes paid until the said supplier files the requisite invoices and the claims of the distributor and supplier are matched.

In the situation of having an option to purchase from multiple suppliers offering the same price, the availability of such score, helps the company to opt for the supplier having a better rating. A high GST compliance rating may affirm to the purchasers that the ITC for the purchases made could be promptly claimed and realized, as their suppliers are compliant.

The present scheme has been introduced to incentivize suppliers to regularly discharge their responsibilities under the provisions of the new regime. A higher rated supplier would enjoy the trust not only of the persons it is dealing with but also of tax authorities andthere would be lesser need of surveillance of its practices. The credit claims of the company will smoothly flow. Also, such rating would enhance the reputation of the company, adding to the good governance facets of organization.

With the introduction of this new concept, the tax authorities present the importance of compliance in this new indirect tax regime. The provision is not only important for the supplier but also acquaints companies dealing with such suppliers, making them alert on whom to deal with.

Though the present stage is quite nascent to evaluate the real impact of this provision in everyday business activities, it is anticipated to bring about a new culture of compliance.This would not only guarantee prompt and accurate compliance but also ensure greater transparency and prevent tax avoidance and evasion.

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