Importance of GST Compliance for SMEs

  • Trade and industry will be assigned a 'Compliance Rating' based on their credibility with regard to timely deposit of taxes to the exchequer and filing of returns under the goods and services tax structure.
  • Revenue Secretary said a system of GST Compliance Rating will be put in place so that every trader or businessman will be rated based on their track record. Once the rating is made public on the GSTN portal, a businessman can decide on whether to deal with another trader or entity who does not deposit tax with the government and therefore, has a low compliance score.
  • The GST Council in due course will approve the procedures to be followed for compliance rating and it will mostly depend on how a trader or business entity has complied with filing returns and other requirements under the Act.
  • A GST compliance rating somewhat mirrors the credit score that CIBIL provides based on the credit history of a borrower. The score is a three-digit numeric summary and depends on an individual's credit payment history across bank loans and credit institutions over time.

The Central GST Act as passed by Parliament also provides that every registered person may be assigned a goods and services tax compliance score by the government based on his record of compliance with the provisions of this Act.

Parameters of GST Compliance Rating

The parameters for determining the rating score are yet to be prescribed. But tentatively below points will be worth considering for the same:

  • Promptness of paying taxes,
  • Timely e-filing of returns,
  • Matching of transactions,
  • Transparent reconciliations,
  • Adherence to various time limits,
  • Cooperation in dealing with tax department

Impact of GST Compliance rating

  • According to the GST Law, refund claims under the GST regime will also be processed on merit basis, i.e. on the GST compliance rating of the registered taxpayer. It is expected that certain slabs rates will be maintained for various taxpayers falling under various bandwidths of compliance rating and the refunds will be made in terms of percentage amount based on the individual rating of the taxpayer.

    • Let’s take an example to understand this further:

    Let’s assume that GST rating will be done on a scale of 1-10, wherein someone rated at 1 is least compliant and a rating of 10 depicts excellent compliance. Now it has been proposed that refunds to a taxpayer will be made in percentage on the basis of these ratings. For example, someone maintaining a rating of 10 will receive 100% of the refund immediately. But another entity having a rating of 8 might get only 80% of his refund claim.

  • This can have a huge impact on small and medium taxpayers who will either have to spend more to deploy a dedicated resource to ensure timely GST compliance or their working capital will remain stuck with tax authorities as pending refund claims. In both scenarios, these taxpayers will have to bear extra costs that will put a burden on their profitability.
  • This can have a huge impact on small and medium taxpayers who will either have to spend more to deploy a dedicated resource to ensure timely GST compliance or their working capital will remain stuck with tax authorities as pending refund claims. In both scenarios, these taxpayers will have to bear extra costs that will put a burden on their profitability.
  • Another dimension to look into GST compliance rating is from the perspective of a buyer. As per the GST law, input credit will only be available when a supplier declares the particulars which in turn are validated by the buyer electronically. Now, if a supplier fails to furnish GSTR-1, return for declaring details of outward taxable supplies, a buyer will not get the credit or will get provisional credit for 2 months of such goods. Thus GST compliance rating becomes more relevant for buyers who want to claim their input credit in a timely manner. Such buyers will always try to purchase from a supplier whose compliance rating is excellent.

Though we are at a very early stage to determine the actual impact of GST compliance rating and how it is going to affect the normal course of carrying out a business, it is always suggested to be ready for the expected changes and embrace them when they come.