Importance Of GST Compliance Rating check

The GST is in the process of steering India towards greater heights from 1st July 2017. Never before has there been such a huge tax reform in India. The GST is also bringing in new concepts like time of supply, mixed and composite supply and most importantly the GST Compliance Rating.

What is GST Compliance Rating?

The GST compliance rating is similar to a performance ranking of all the registered taxable people which tells you how compliant they are with respect to the GST provisions. This will be irrespective of size, nature or turnover of the business.

Why is the GST Compliance Rating being introduced?

The idea behind this new concept of tax administration is to make people fully GST compliant and on time with the uploading of invoices and other necessary documents.

Under the GST, a person can claim an input tax credit in GSTR-2 (return with purchase details for the month) only when the seller also files his GSTR-1 (return with monthly sales details), and the details on both these forms reconcile or match with each other.

Previously, businesses often delayed return filing and the payment of taxes to gain time. A similar practice under the GST will result in a delay in input tax credit across the chain and severely affect the working capital of businesses. The rating system will prevent delay of credit for bona fide buyers due to non-compliance of certain persons.

How will someone be rated under the GST?

The criteria under which the GST Rating will be based are yet to be prescribed. Nevertheless, experts believe that the following factors may play a key role in deciding compliance ratings:

Timely payment of the taxes
Timely filing of the returns
Timely reconciliations
The compliance of various other time limits under GST
Cooperating with GST authorities

How will GST Rating work?

Based on the rating, your business and you will be able to enjoy certain benefits. It has been proposed that the refunds to taxpayers will be made on the percentage basis of these ratings.

For example.

Suppose a taxpayer has a rating of 8. He is eligible to claim a refund of Rs. 10,000. Now, based on his compliance rating (which is 8), he gets an instant provisional refund of Rs. 8,000 when he applies for a refund. The balance of Rs. 2,000 shall be paid later after scrutiny.

Likewise, a person with a rating of 6 will get only 60% of the refund. Only a person with a minimum of GST rating of 5 on 10 can avail a provisional refund.

Note: The final rules concerning this are not yet to be notified.

What are the benefits that one can enjoy?

Some of the benefits that a compliant vendor may be able to enjoy include:

Buyers can get an input tax credit immediately
Get immediate refunds
Get more business
Reduce the chances of an audit by the tax authorities.
A low GST rating will attract higher scrutiny from the department.
Enjoy a better reputation

How will businesses benefit by becoming GST compliant?

The simplest way to understand this is through an example.

Ajit requires some office stationery. He has shortlisted 2 sellers – ABC & XYZ.

ABC has a 9 rating whereas XYZ’s rating is 6. Ajit gets to know from his friend Vinay that the company XYZ doesn’t file its GST returns on time resulting in the input credit being blocked, while the company ABC is well-rated and highly compliant.

As suggested by his friend and the vendor’s ratings, Ajit places an order with the company ABC.

Effect on the buyer:

Buyers will look for sellers with a higher rating which will ensure they can avail the input tax credit faster.

Effect on the sellers:

Sellers who have a higher rating will attract more customers.

Thus, the GST rating will bring about healthy competition between businesses. A potential client will enquire about the compliance ratings of the suppliers before entering deals.

What are the disadvantages of this rating scheme?

Businesses will have to be compliant to remain competitive. This may prove difficult for small businesses who do not have the resources to be fully compliant; at least in the beginning stages. The GST is an entirely new tax regime and the businesses will unavoidably be prone to errors. Delays, errors, and non-compliance will affect the vendor’s rating, and hence the business may suffer.

The compliant vendor will be at an advantage as they can easily be distinguished from their competitors. This shall also prove beneficial to the large players who have more resources.

How does one get to know their GST rating?

The compliance rating score will be updated periodically. It will be intimated to taxpayers and also be available publicly.