Perils of Tax Administration with Algorithms & Recent Notice

GST – Perils of Tax Administration with Algorithms & Recent Notices

On 12th and 13th November 2021, many taxpayers in Telangana, falling under the administrative jurisdiction of “State Tax authorities” were shocked and surprised to receive an alert in their e mail, that they have been issued show cause notices (Form DRC 01 – demand notices under Sec. 73 of CGST/TSGST Act, 2017) which can be downloaded from their dashboard on GST portal. These notices have been issued for the years 2017-18, 2018-19 and 2019-20. The taxpayers were given two weeks’ time to submit the reply or pay the tax with interest within 30 days to avail zero penalty benefit.

All these notices are system generated, with liabilities arrived based on some equations and comparisons from the GSTR 9 (Annual Returns). However, it appears that these equations and algorithms are based on some wrong assumptions and presumptions with scant regard to the relevant legal provisions, causing a lot of inconvenience to the taxpayers. The following are some issues where flawed logic has been applied.

1. The Notices compared the turnover as per TDS return in Form GSTR 7 by the Government entities for a GSTN, with the turnover in GSTR 9 declared for that GSTN and demanded GST on alleged excess turnover in TDS return. This is totally wrong. TDS by Government entities is done at the time of “making payment” to the taxpayer (Ref Sec 51) while the corresponding turnover is reported by the taxpayer at the time of issuance of invoice on “accrual basis”. Hence, both need not necessarily tally for a tax period. It is like comparing oranges with apples.

2. The Notices adopted “exempted supplies” from GSTR 9 and disallowed proportionate input tax credit under Rule 42. This is not correct, as many taxpayers have income like “interest on deposits” which is declared as an exempt supply in GSTR 9, but there is no requirement to reverse proportionate credit on such income. This is clearly mentioned in Rule 43.

3. Further, as per Rule 42, only “common credit” used for exempted and taxable supplies has to be apportioned, but the notices apportioned “Total ITC declared in GSTR 9” by wrongly (knowingly?) mentioning it as “common ITC”. 4. The notices listed out certain input invoices mentioning commodity HSN/SAC like electrical items, iron and steel, works contracts etc. and asking the taxpayers to reverse it. First of all, ineligible ITC specified under Sec 17(5) is not based on any HSN codes. For examples, iron and steel per se cannot be denied ITC as the eligibility depends on the actual usage of inputs rather than the commodity HSN.

5. Further the notice presumed that the taxpayers have availed credit on these ineligible items on the ground that the quantum of ineligible credit was not declared in Table 7E of the GSTR 9. While reconciliation of eligible credit from GSTR 2A with books itself is a herculean task, expecting the taxpayers to disclose even the credit not availed in returns will make compliance more difficult.

Another interesting issue is the DRC 01 notices have been issued under Sec 73 read with Rule 142(1) on GST portal. The notices in PDF downloaded from GSTN have a hyperlink to file taxpayer’s response. If we click on this link, it is leading to a website hosted by IIT Hyderabad. As per Rule 142(4), a reply to DRC 01 shall be filed in Form DRC 06 on the common portal. What is this IIT Hyderabad website? What is its legality? Whether filing responder in IIT Hyderabad website amounts to proper compliance under Rule 142(4)?

While the benefit of using technology for tax administration is not disputed, mindless application of algorithms makes all taxpayers of the state as evaders of tax overnight. No wonder these taxpayers under State Administration are jealous of their brothers falling under Central Tax authorities’ control, as at least there is a method in madness with them.

Team Edu-Visor