Understanding India's GST Compliance Rating System

India's Goods and Services Tax (GST), introduced on July 1st, 2017, represented an unprecedented tax reform. It brought forth various new concepts, including mixed and composite supply, time of supply, and significantly, the GST Compliance Rating.

What is the GST Compliance Rating?

The GST compliance rating serves as a performance metric for all registered taxable individuals, indicating their adherence to GST regulations. This rating will apply universally, regardless of a business's type, scale, or revenue. While the specific rating methodology is still awaiting official notification, a potential system could involve a scale of 1 to 10, where 10 signifies exceptional compliance and 1 indicates minimal adherence.

Why is the GST Compliance Rating Being Introduced?

This tax administration initiative aims to encourage complete and timely GST compliance, including prompt uploading of invoices and other essential documents. Under GST, claiming input tax credit (ITC) in GSTR-2 (monthly purchase details) is contingent upon the seller having filed their GSTR-1 (monthly sales details), with corresponding details matching between both forms. Historically, businesses sometimes delayed return filings and tax payments for extended periods. Continuing such practices under GST would lead to delays in input tax credit throughout the supply chain, significantly impacting business working capital. The rating system is designed to prevent legitimate buyers from experiencing credit delays caused by non-compliant sellers.

How Will Taxpayers Be Rated Under GST?

The precise criteria for GST rating are still to be formalized. Nevertheless, specialists anticipate that several critical elements will influence compliance scores. These include prompt tax payments, punctual filing of returns, timely reconciliation of data, adherence to various other GST deadlines, and cooperation with GST authorities.

Understanding the GST Rating Mechanism

Businesses and individuals with a higher GST rating are expected to receive various advantages. A proposal suggests that tax refunds will be processed based on a taxpayer's compliance score. For instance, if a taxpayer holds a rating of 8 and is due a refund of Rs. 10,000, they would receive an immediate provisional refund of Rs. 8,000, with the remaining Rs. 2,000 disbursed after further review. Similarly, a taxpayer with a rating of 6 would receive 60% of their refund provisionally. It is important to note that only those with a GST rating of at least 5 out of 10 would qualify for provisional refunds. The specific regulations for this system are still pending official notification.

Benefits of a High GST Compliance Rating

Compliant suppliers can anticipate several advantages, such as expedited refund processing, immediate availability of input tax credit for their buyers, increased business opportunities, a lower likelihood of tax authority audits, and an enhanced reputation in the market.

Advantages for Businesses from GST Compliance

Consider a scenario where Ajay needs office supplies and is evaluating two vendors: ABC, with a rating of 9, and XYZ, with a rating of 6. Ajay learns from a friend that XYZ frequently delays GST return filings, which can block input tax credit, while ABC is known for its high compliance. Based on this information and the ratings, Ajay decides to purchase from ABC. This illustrates that buyers will favor highly-rated sellers to ensure quicker access to input tax credit. Consequently, sellers with superior ratings will attract more clients, fostering beneficial competition among businesses. Potential clients are likely to assess suppliers' compliance ratings before engaging in any transactions.

Drawbacks of the GST Compliance Rating System

For businesses to maintain their competitive edge, adhering to compliance standards will be essential. This could particularly burden small businesses, which may lack the resources to achieve full compliance, especially during the initial implementation phases of the GST regime. Given that GST is a new tax system, businesses are susceptible to making mistakes. Errors, delays, or non-compliance could negatively impact a vendor's rating, potentially leading to business setbacks. Conversely, compliant vendors will gain an advantage, standing out from less compliant rivals. This system will also favor larger enterprises that possess greater resources.

Accessing Your GST Rating

The GST compliance rating will undergo regular updates. Taxpayers will be informed of their score, which will also be made accessible to the public.