The recent instruction No.03/2023-GST dated 14th June 2023 issued by the Central Board of Indirect Taxes & Customs (CBIC) prescribing guidelines for processing of applications for registration under GST has been making news. The instruction running into six pages is a very detailed list of activities which the ‘proper officer’ is expected to do. 

Scrutinise all documents uploaded along with the application for registration, check for completeness and correctness, cross-verify authenticity ‘to the extent possible’, verify if the same PAN has been used for obtaining multiple registrations. The officer is also advised that she or he can seek clarification in certain cases like incomplete, incorrect details being furnished. Where the proper officer is thus satisfied, the instruction states that registration should be given. Where she is not, notice could be issued. In cases where Aadhaar authentication has not been opted or even were opted for, but the proper officer feels a physical verification is essential then the instruction urges her to do so. Physical verification is permitted.  

The Directorate General of Analytics & Risk Management (DGARM) would be conducting a risk rating of all applications. Depending on the application, they would be graded High, Medium, or Low risk which analysis would be made available to the field formations. The proper officer is to take this into consideration the DGARMS’s inputs while processing the application. These instructions highlight what is in the GST law and the Rules. One can quibble that by making explicit what is obvious there is a danger of the proper officer acting with undue suspicion-acting ‘improperly’.

Having said that it should never be forgotten that Registration is a critical event. It the only way in which the department gets to know the taxpayer. Registration it is which gives the taxpayer legal recognition as a supplier of goods and services. Registration it is which given the taxpayer a legal entity-to collect tax, claim input tax credit and pay taxes. A good registration process is integral to a good tax system.

We should also not forget the backdrop in which these instructions were issued. The CBIC had in May 2023 issued instruction No.01/2023 GST. These instructions highlighted the serious problem of unscrupulous elements misusing identity of others, of obtaining false/bogus registrations with an intention to defraud the exchequer. This in turn triggers the issue of fake invoices leading to fake credit being availed and passed on -with neither supply of goods nor services.

Bird & Gendron have pointed out that VAT or in our context GST, is the only tax that requires the Government not only to collect substantial tax but also pay much of it back to the same people in the form of input tax credits. Any invoice thus constitutes an ‘essential claim on public funds’-money which otherwise the government would have got now being paid through utilization of input credit. And where this critical document is fake there is a direct loss of revenue to the exchequer.

The May 2023 instructions highlighted the extent of fraud and set in motion a nationwide concerted drive against fake registration and fake input tax credit. The drive was aimed at detecting ‘suspicious/ fake registrations and to conduct requisite verification for timely remedial action to prevent any further revenue loss to the Government’.

Obviously the drive was very successful. The drive which started on 15th May 2023 resulted, as per news reports in the detections of 10,000 bogus GST registrations in the very first week. The total amount of input tax credit fraudulently passed or availed on such fake registrations was estimated to be above Rs,25,000 crore.

Another way to look at the initial results of the special drive was that it has caused a huge alarm in CBIC and triggered the second instruction within 29 days of the earlier instruction on the same matter. This is rather unusual and reflective of the seriousness of the problem. The exercise of tax gap-the difference between what ought to be collected and what is collected, is always difficult. It is an exercise most tax administrations baulk from doing because of the challenges in getting any correct estimate. However it is an exercise which given the robustness of GSTN and the maturing of DGARM can now be attempted in association with the enforcement & intelligence wing . This can be an internal exercise and will give the administration a clear focus of the extent of the problem and help actions be more targeted.

There should be close monitoring so that the special drive and the latest instruction do not cause any inconvenience to the small/MSME taxpayer. Genuine tax payers should be spared the wrath of over enthusiastic officers. The GST law and Rules prescribe timelines for the process of registration to be completed- the instructions should not result in these timelines being breached. We also want to expand our tax base, but the process of verification should be handled in a way where we do not frighten a potential tax payer from registering. Given the extent of fraud these instructions were perhaps necessary; but care should be taken to ensure that they are implemented with a light hand.