The Goods and Services Tax (GST) Council is expected to deliberate on a report by a ministerial group, which suggests instituting a differentiated regime for industries with significant tax evasion. Tax evasion is an illegitimate way to lower tax payments through deceptive means, such as deliberately understating taxable earnings or exaggerating expenditures. It is considered an illegal endeavor to decrease one’s tax responsibilities.
What is the GST Council?
The GST Council is a constitutional body, deriving its authority from Article 279A, tasked with providing recommendations to the Union and State Government on issues pertaining to Goods and Services Tax. The Union Finance Minister chairs the GST Council, and its members comprise the Union State Minister of Revenue or Finance and Ministers responsible for Finance or Taxation from all states. The GST Council is recognized as a federal body where both the central and state governments receive their fair representation.
The Background
Previously, the GST council formed a Group of Ministers (GoM) to evaluate the call of some states to tax sectors with high rates of tax evasion based on production capacity rather than output, known as Special Composition schemes. This capacity-centric tax approach focuses on manufacturing potential rather than actual production. High tax evasion sectors encompass brick kilns, sand mining, and gutkha and pan masala production. For example, tax evasion amounting to Rs. 830 crore was found in a single pan masala unit early this year.
Concerns about Capacity Based Tax
The proposal for capacity based taxation contradicts the fundamental structure of GST, which aimed to secure revenue buoyancy aligned with an increase in sales volumes. It could also lead to similar demands from other sectors such as textiles. Implementing such a system might not be seamless and may not even produce the intended outcome of curbing tax evasion, often attributed to exceedingly high tax rates. Additionally, any such shift would undermine the basic concept of GST and convey a negative message to law-abiding taxpayers. It has the potential to instigate increased complexity in the GST structure.
Finding a Solution
Historically, composition schemes have failed to effectively control tax evasion, resulting in widespread litigation over production capacity disagreements between revenue authorities and producers. To address GST evasion issues, the government should explore enhanced data analytics and introduce stringent, innovative legal provisions to discourage tax avoidance.
