CAG Flags High-Risk Taxpayers for Likely Undeclared Turnover to Exploit GST Composition Levy Scheme

In a recent report, the Comptroller and Auditor General of India ( CAG ) flagged a huge number of high-risk taxpayers who are likely under-declaring their turnover to continue availing benefits under the GST Composition Levy Scheme (CLS). The CAG report identifies systemic issues and potential misuse of the scheme which is intended for small taxpayers.

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Findings of the Report:

Inward Supply Threshold Breaches:

• Taxpayers whose inward supplies exceeded Rs. 1.5 crore (Rs. 75 lakh for special category states) were identified as high-risk for under-declaring outward supplies to remain under CLS.
• Over 1,820 taxpayers had inward supplies breaching the threshold in three consecutive years (2019-2022).
• Of these, 58% were identified as pharmaceutical dealers with high procurement values but outward supply declarations within CLS limits.

Top 5 pharmaceutical taxpayers had average inward supplies of Rs. 17.63 crore during the period.

High-Value Goods Traders

• Dealers in goods attracting higher GST rates, such as motor vehicles, electronic goods, and air conditioners, were flagged. Their inward supplies consistently crossed the threshold limits, raising concerns of misreported outward turnover.
• In the case of taxpayers dealing in 28% GST goods, 342 entities were found with inward supply breaches in multiple years.

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Marginally Declared Turnover: The CAG observed that 5,404 taxpayers reported turnover marginally below the CLS threshold (Rs. 1.4- Rs. 1.5 crore) to avoid transitioning out of the scheme. Out of these, 178 taxpayers consistently declared turnover in this range for three consecutive years, categorizing them as "medium risk."

TDS Data Analysis: Government departments filing GST TDS returns revealed that 420 taxpayers had annual supply values exceeding CLS limits, making them ineligible for the scheme. A further 290 taxpayers reported values close to the threshold.

Systemic Weaknesses Identified:

The CAG report emphasized that the current CLS eligibility system relies only on outward supply declarations made by taxpayers. It does not incorporate inward supply data or cross-checks with external databases like income tax filings or TDS data. This loophole enables some taxpayers to under-report turnover while remaining eligible for CLS benefits.

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Audit Recommendations:

The CAG recommended the Central Board of Indirect Taxes and Customs (CBIC) to:

1. Implement automated red-flagging mechanisms to identify high-risk taxpayers based on inward supply data and third-party records.
2. Use risk-based approaches for periodic compliance verification.
3. Cross-verify outward supply declarations using data from sources like TDS filings, Income Tax Returns, and Vahan databases for motor vehicle dealers.

“The Ministry should identify high-risk taxpayers in the CLS on a periodical basis using a risk-based approach and verify their declared value of outward supply from other sources including the third party to minimize the possibility of misuse by ineligible persons.”

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Government Response:

In its preliminary reply, the GST Network (GSTN) stated that eligibility checks for CLS are based only on outward supply declarations. The Ministry has acknowledged the audit's findings and is reportedly examining ways to develop risk parameters for identifying high-risk taxpayers.

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