Soon after the new government takes over in June, we will have completed seven years of the introduction of the goods and services tax (GST) in the country. Given that a detailed programme for the new government’s first hundred days in office is already being drawn up, it is quite likely to feature further reform in this new tax system.

The GST project continues to be a work in progress. Some major concerns persist. Primary among them appears to be the lack of certainty or predictability. Disputes about the applicable rate of tax, availability of exemption or input tax credit (ITC), or even the taxability of certain supplies arise frequently. Investigations are often initiated by multiple central and state authorities. The system churns out thousands of demand notices mechanically based on (what trade perceives to be) “minor” discrepancies or gaps in data submitted in the returns. According to one media report, in December 2023 itself, GST authorities issued demand notices totalling `1.45 trillion to around 1,500 businesses for inconsistencies in annual returns and ITC claims for FY18. There is cynicism about whether tax authorities would fairly resolve such a large stock of demands or show cause notices. The chances of prolonged litigation in many cases are high, increasing uncertainties both for revenue and trade and also clogging a burdened dispute resolution mechanism

A higher incidence of disputes in a new tax regime is understandable. But to salvage the spirit of GST as a “good and simple” tax, its approach to dispute resolution needs a rethink. A multi-pronged approach is necessary both to curb disputes and resolve them early and fairly. A good beginning can be made by rationalising the rate structure to compress the number of rates, removing rate inversions (for instance, the Council decided to do so for the textile value chain but kept it in abeyance), and, wherever possible, broad-band rates for similar products (e.g. bread, buns, dinner rolls, and paratha). The time to do so is opportune when revenue collections are on a steady uptick. Combining rate compression with expansion in the tax base by including at least some petroleum products such as natural gas within its ambit could cushion fears of revenue loss.

The GST administration, both at the Centre and states, must adopt a more nuanced philosophy of compliance. While aggressive enforcement is essential for dealing with egregious offences such as fake invoicing, fake ITC, and outright tax evasion , other tools must be deployed to tackle less severe incidents. Compliance management entails bringing about a change in behaviour, which cannot be achieved only through “entrapment”, i.e. waiting for an offence to be committed and then stepping in to penalise. There needs to be an equally credible strategy to at least prevent non-compliance and assist the majority of taxpayers, especially micro, small and medium enterprises who do not wish to violate the law but are prone to erring. A convention of issuing periodical advisories pointing out common data errors, discrepancies, or other forms of non-compliance discovered during the scrutiny of returns, audit, or even enforcement, should be put in place. One of the major sources of non-compliance is wrong availing of ITC. It may help to clearly stipulate what “reasonable steps” a taxpayer receiving a supply of goods or services may take to prevent allegations of evasion. Such provisions were included in the erstwhile Central Excise and Service Tax law.

In the same vein, contentious issues that come up during compliance verification should be clarified promptly by the Council to prevent further disputes. If a practice of assessment followed by the trade is found to be at odds with the intended interpretation of law, such clarifications should — unless the practice was based on suppression of information or misdeclaration — certainly rectify the practice, but desist from recovery of tax for the past beyond the normal period of limitation.

Many tax administrations publish a compliance strategy, announcing in advance the industry segments that would be targeted during a period, the type of non-compliance that they would be looking for, as well as the risk parameters for identifying violators. This has a very favourable impact with many in the targeted segment falling in line.

On their part, the taxpayers also need to take responsibility and collaborate, for instance, to make sure that their return data is accurate, consistent, and foolproof when working in a digitalised environment, lest the hands-free risk-management system pick up gaps and discrepancies that become the starting point for disputes. Greater sensitivity to data quality and consistency by the trade could make the flurry of demand notices a thing of the past. They should also use the legal provisions of voluntary compliance, as and when needed, to prevent protracted disputes and litigation.

The creation of a national online platform for hosting live data on issues or cases where either the central or state administration has initiated investigation would help prevent the exposure of taxpayers to multiple authorities. The recent announcement that GST audits would be conducted jointly by the two authorities in a few difficult sectors would also achieve the same objective.

The most critical yet difficult part is to instill and enforce a sense of fairness and timeliness among officers dealing with disputes. Perhaps the signpost language of such instructions is followed, but owing to a lack of ownership and conviction as well as the tendency to play safe, the outcomes do not inspire confidence in the system. There is no censure for such behaviour, just as there is no reward for resolving disputes constructively and reasonably. Constant training and re-skilling of officers in dispute resolution, coupled with a suitable incentive structure for promoting rationality, would be an important means of reorienting this important business process.