The implementation of the Goods and Services Tax (GST) in India was a transition in the Indian tax system that sought to centralise the taxes for businesses and make them friendlier. Another critical component of GST is the use of the assessment to fix the amount of tax paid, this ensures that organizations pay the correct amount of tax based on their operations. In its effort to address the fairness, compliance, and ease of doing business, the government has put in place some techniques of evaluating tax measure. They enable organisations to determine their tax requirement to the letter, which is desirable especially when businesses do not want to be on the wrong side of the authorities. It is important for businesses under GST to comprehend the various processes involved in the methods mentioned above.
Key Aspects of GST Tax Liability Assessment
Business entities paying tax under GST have to determine their tax obligation through a number of processes that may differ due to the nature of transactions, the nature of their businesses, or whether such businesses encounter difficulties in filing or reporting taxes. All the methods are crucial as they help businesses comply with tax laws effectively and efficiently.
Self-Assessment
The primary principle of GST is to promote “ease of doing business” by unifying multiple taxes into a single system. Self-assessment is one of the methods under GST, allowing taxpayers to independently calculate their tax liabilities.
Process:
- Taxpayers use their sale and purchase records for the period and compute their tax.
- The tax liability is of two types, which are declared through various returns like GSTR-3B (a consolidated return) and GSTR-1 (a return for exclusively outward supplies).
Advantages:
- It promotes accountability and transparency.
- Enable businesses to effectively address their compliance needs.
Example: A retailer will calculate the GST collected on sales for the month and offset it with the GST paid on purchases to determine the net liability.
Provisional Assessment
Provisional assessment is one of the legal rights available to the business when it is hard to agree on the value of the good or service, or even the right tax rate to apply. This method allows businesses to be legal while they wait for clarification on some issues.
How It Works:
taxpayers must apply for a provisional assessment only when they face uncertainty regarding the tax rate or classification, not solely due to unusual values or rates.
In provisional assessment, businesses provide an estimate of tax, but the tax authorities issue a provisional order which is later finalized after assessing the relevant facts and circumstances.
Key Benefits:
- Prevents the postponement of taxes and remains tax compliant even when specificities are not well understood.
- Affords businesses the opportunity to work out tax Issues.
Example: An exporter engaged in export of specialized goods whose tax is not well determined prefers provisional assessment to avoid cases where he is found to be in contravening the law.
Scrutiny of Returns
The GST authorities check the returns filed for its accuracy and correctness of the data as input to the system. Such measures help establish differences or errors in the previous reporting of taxes.
Objective:
- Notify when there is an error in the returns that reflects an incorrect tax computation.
- Checking whether businesses are observing formal GST law.
Process:
Where disparities are identified, the tax authorities communicates with the taxpayers and demands that they explain the inconsistency or provide corrections.
Significance:
Contributes to the preservation of accuracy and reduction of tax fraud.
Example: Where a business misreports the Input Tax Credit (ITC) on purchases then the business may be targeted for scrutiny.
Summary Assessment
Sometimes, due to the evident tax liability, the tax authorities may opt to undertake a summary assessment in order to prompt action, and protect state revenue.
Applicability:
- Used in situations where there is strong evidence of non-compliance or undeclared tax liability.
Process:
No extensive investigations are carried out, and tax authorities can act quickly when there is an urgent need to recover revenue.
Significance:
The benefit of allowing the agency to take immediate action on behalf of the business where delays to a full investigation may lead to the loss of revenue.
Example: Goods are intercepted during transport without proper documentation, leading to a summary assessment of tax liability.
Best Judgment Assessment
This method is used when a taxpayer is in arrears or when he/she is unable to give details specifics of the tax remittance expected of him.
Types of Best Judgment Assessments:
- Assessment of Non-Filers: If a taxpayer has not filed his GST returns.
- Assessment of Unregistered Persons: Whenever an entity having registration liability in GST does not register.
Procedure:
The tax authorities assess the tax liability based on available records, but the “any other depending records.
Consequence:
While penalties exist, this description is overly vague and does not elaborate on the different scenarios under which penalties apply. For example, penalties differ for willful neglect versus genuine errors.
Example: A business that has not filed its GSTR-3B for a quarter may have its tax liability calculated pursuant to records made earlier.
Audit under GST
A tax audit is performed to ensure that data filed with the taxpayer is accurate and to check compliance with GST.
Types of Audits:
- Audit by Registered Dealers: The turnover limit for mandatory GST audits is updated annually. The threshold may vary based on the type of business or the latest tax regulations.
- Audit by Tax Authorities: Prepared by GST officials to ascertain compliance of registered persons and their returns, taxes paid and claimed ITC.
Process:
Auditors also observe business documents, accounts and other vouchers, invoices and other related records.
Outcome:
- Ensures accurate reporting, compliance, and proper tax payment.
Example: a major manufacturing firm has gone through the course of a tax audit to confirm the ITC claimed in the period.
Advance Ruling
An advance ruling is a process through which an organization can seek clarity on the classification, applicability, and taxability of goods or services under GST. It is particularly beneficial for businesses operating in sectors with high contractual risks or emerging business models.
Applicability:
- Assists organizations to know the tax level of particular products or services.
- Provides certain definitions in relation to eligibility of Input Tax Credit (ITC) for specified supplies.
- Adjudicates on the difficult issues arising out of classification of transactions under GST.
Benefits:
- Reduces litigation.
- Provides certainty on tax liabilities and classifications.
Example: A software company is importing Service/signed Software as a service product and he wants to know the correct rate of GST.
Demand and Recovery
Demand and recovery processes can be initiated based on discrepancies found in returns, not just accusation.
Key Features:
- Taxpayers receive notifications in terms of the amount of the amount due.
- The taxpayer has specific options to appeal through adjudicating authorities or accept and settle.The process for disputes involves appellate tribunals and potentially courts.
- If the demand is not met, the following recovery mechanisms can be employed like attachment of bank accounts or property.
Objective:
- To ensure that unpaid taxes are collected and to penalize businesses for non-compliance.
Example: A service provider minimizes their turnover and thereby pays less GST which leads to demand and recovery measures.
Conclusion
Gaining a clear understanding of all the methods that enable a business to determine their rate of tax under GST are paramount, thus preventing businesses from incurring penalties. Self assessment is still the preferred mode of assessment; but provisional assessments, audits, advance rulings, and other forms of assessment serve as checks and balances. Through continued activity, it becomes possible to work through the many issues surrounding GST and make the right payment on time and at the right intervals through legal means for the smooth operation of the business.
To discuss the issues concerning GST compliance and any other taxation matters feel free to approach The Legal Dost consultancy services for expert advice on changing taxation procedures. We would like to help you to step into the GST world with a high level of confidence and ability.
Understanding the Different Methods of GST Tax Liability Assessment (FAQ)
GST Tax Liability Assessment can be described as the process of arriving at business liability under GST legislation. They range from self-assessment, provisional assessment and assessment of returns with a view to assessing correct tax payment and compliance.
Self-assessment is the most widely employed as a technique, in which the taxpayers estimate the taxes they are likely to pay by analyzing their sales and purchases documents and file their returns accordingly.
Provisional assessment is needed when a business lacks concrete information about the value of goods or services or the tax rate. It means that it allows the business to pay taxes temporarily especially until the GST authorities make their final ruling.
Scrutiny of returns helps in correcting the actual data provided by companies and individuals in their GST performances. It assists in pointing out gaps or mistakes in tax calculation and ensures that the GST laws are followed to the letter.
Summary assessment is initiated by GST authorities when there is clear evidence of non-compliance or undeclared tax liability. It allows authorities to act promptly without thorough investigations to protect state revenue.
A GST audit means a scrutiny of records including accounts, documents and returns submitted by the business entity to scrutinized whether the returns filed by the business entity are correct as per GST laws or not. Audits may be from the registered dealers themselves or the tax authorities.
An advance ruling is a written and binding determination of the central or state GST authorities in respect of any specific point of taxation that is, whether a particular goods or service is liable to tax or not, what rate of tax is to be levied, whether ITC is claimable under certain circumstances or otherwise.
The demand and recovery proceedings are triggered when a taxpayer has underpaid taxes or has not complied with GST regulation. It include notification, appeal, and methods of getting back the outstanding tax such as attaching property.
Consequences differ in a way depending on whether they resulted from actions and decisions or from carelessness and negligence. They may be monetary, interest on the amount of taxes owed, as well as legal consequences among them seizing of property.
The Legal Dost offers professional consultancy to assist companies to understand GST process, get the right taxation measurement, and meet legal requirements. You can consult with us for the GST-related issues of your interest.