Govt to introduce reverse charge mechanism to check GST evasion

Key highlights:

• Under it, recipient of goods or services are required to pay GST instead of suppliers
• Small businesses have been against implementation of reverse charge
• A six-member business advisory panel recommended to scrap this provision altogether

In its bid to check evasion, especially by traders and small businesses under goods and services tax (GST), the government is likely to introduce the reverse charge mechanism, wherein, recipient of goods or services are required to pay GST instead of suppliers, said a report. 

This will ensure more transactions to increase coverage of GST to the unorganised sector, thus boosting tax collection, said the Financial Chronicle report, which quoted a Financial Ministry official saying as, “We will soon implement reverse charge mechanism.” 

The controversial GST feature will reportedly help the government estimate turnover of small firms, and also prevent the firms from hiding their actual turnover and profits. Through this, all sundry expenses of the companies would come in the GST network’s digital system.

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Citing tax experts, the report said though reverse charge mechanism would definitely improve compliance, it would increase documentation burden on companies.

“Implementation of reverse charge mechanism could increase difficulties for businesses. The government may therefore reconsider its decision. It should first allow the basic thing to settle down and then bring this also,” Amit Bhagat, tax partner at PwC, told the newspaper.

It may be noted that small businesses have been against implementation of reverse charge, citing the compliance burden. 

A six-member business advisory panel formed by the government to suggest measures to make GST more taxpayer-friendly had few weeks ago reportedly recommended that this provision be scrapped altogether.

The panel consisted of Ajay Sahai, director general and CEO of Federation of Indian Exporters Organisation (FIEO), Praveen Khandelwal of Confederation of All India Traders (CAIT) and Gautam Ray, former DG (audit), customs and central excise, as its members.

In the wake of protests from trade and businesses, the GST Council had reportedly put the reverse charge clause on hold.

The Finance Ministry, however, believes tax evasion among small businesses is one of the reasons for the recent drop in GST collection, therefore, it seeks to plug the loopholes.

It may be noted that monthly tax collection in November at Rs 80,808 crore was the lowest in last 5 months of the GST roll out. The overall tax collection is below expectation, forcing the government to borrow Rs 50,000 crore more from the market to meet committed expense.