The Comptroller & Auditor General’s (CAG) reports, with their emphasis on financial, compliance and performance functions of the government, play an essential role in keeping departments on their toes.

The CAG’s latest audit report (No.5 of 2022) for the year ended March 2021 is on the levy and collection of Goods & Services Tax (GST). Incidentally, it is the third (earlier reports being Report No.11 of 2019 and Report No.1 of 2021) CAG audit of the five-year-old indirect tax.

The CAG report acknowledges the growth in indirect taxes collection with a corresponding upward trend in the annual growth. However, the report suggests the growth is more because of central excise and Customs duty contributions.

The audit points out that the simplified return system had yet to be rolled out. It has been suggested that more steps are needed to ensure effective compliance verification — 'a non-intrusive e-tax system with system verified flow of input tax credit'. They have also pointed out that no effective scrutiny system is in place. A risk-based standardised system of returns' scrutiny has been recommended.

It has been suggested that the Directorate General of Analytics & Risk Management (DGARM) is yet to leverage the full power of IT and the need for end-to-end automation. The audit has also questioned the reliability of GST data maintained by GSTN.

They have suggested that there are data inconsistencies between taxable value and declared taxable value. They have similarly found cases of incorrect/double refunds having been given and the lack of a verification mechanism. Several recommendations have been made to strengthen the refund process.

CAG has also expressed concern about no verification or faulty verification in several cases of transitional credit -and non-production of records for the Audit to cross-check. It may be recalled that this was credit as available to taxpayers in the central excise/service tax and VAT regimes when transitioning to GST. The transitional credit was to be subjected to post-claim verification.

Thus, as can be seen, the audit has made many pertinent observations.

Tax revenues in 2021-22, the year following the audit report under discussion, had done exceedingly well. It exceeded the Budget Estimates by Rs 5 lakh crore, Rs 27.07 crore, as against an estimate of Rs 22.17 crore. This was the highest ever tax to GDP ratio at 11.7 percent — direct tax being 6.1 percent and indirect tax 5.6 percent. GST witnessed exemplary growth despite the pandemic.

Yes, central excise and Customs revenue contributed to the indirect tax revenue. But then, CGST revenues also increased from Rs 4.6 lakh crore to Rs 5.9 lakh crore in 2021-22.

GST revenues have been consistently doing well in 2022-23. July saw the second highest revenue collection at Rs 1,48,995 crore. As the recent paper of SBI Research points out, a surge in economic activity and inflation is driving the growth. The paper suggests that up to 8 percent of the revenue rise can be attributed to inflation.

The year also witnessed GSTR 3-B filing improve from 74 percent in September 2020 to 87 percent in February 2022. The GSTR 1 filing improved from 54 percent in September 2020 to 82 percent in February 2022. The gap between the GSTR 1 and GSTR 3B returns has narrowed significantly.

Simplification of returns and processes has been a constant endeavour of the CBIC. It may be recalled that as early as the 28th meeting of the GST Council, new return formats had been approved. And this has been a journey since. The challenge has always been to ensure sufficient information is called for to ensure verification without it being unduly cumbersome. It would have been nice if CAG had also suggested what the simplified returns they have in mind is.

The importance of scrutiny of returns cannot be overemphasized. Returns, once filed, cannot sit in the entrails of the department. The GST law provides for scrutiny of returns. The CBIC has issued instructions (No. 02/2022 dated 22 March 2022) stipulating standard operating procedures. DGARM has been assigned the task of selecting the GSTINs registered with Central tax authorities, whose returns are to be scrutinised and inform the field formations accordingly.

The last Budget did away with Sections 42,43, and 43A of the CGST Act. This in effect, did away with the two-way communication process in return filing. The Budget had proposed instead to auto-generate a statement of inward supplies designed to take care of possible mischief.

GSTN has settled admirably. The process has been rocky. The frequent changes in processes, laws and rates did not help. But this is a reality that GSTN has to be alive to. Five years later, GSTN is sitting on mountains of data and sharing this with multiple departments. The validation process to check inconsistencies in data is being put in place. If at all there can be a criticism, it can be that data should be made openly available to facilitate research.

Several data-driven models have been launched. Artificial Intelligence and Machine Learning (AI ML) is increasing. DGARM is making excellent use of this data to make focused interventions. Almost all the major detections of evasion, which sadly continues, have been risk-based and on DGARM inputs. A humongous case involving Rs 5,500 crore of fraudulent credit is the latest.

So, it can be seen that very many of the CAG’s concerns have been addressed. But there are areas refunds and the issue of transitional credit, which need urgent attention. The department's aim should be to give what is due to the taxpayer. This can be done only after verification — having said that, the process must be time-bound and transparent.

- Najib Shah is a former chairman of the Central Board of Indirect Taxes & Customs. Views expressed here are personal.