Eliminating GST Evasion at Retail Businesses: A Proposal for Streamlining Compliance

The retail sector plays a vital role in the Indian economy, contributing approximately 10% to the nation's GDP. With India's GDP estimated at ₹174 lakh crore, the retail sector's contribution amounts to ₹17.4 lakh crore. Assuming an average GST rate of 12% on retail transactions, the potential GST collection from this sector could reach ₹2.088 lakh crore (Including from ITC) annually but cash collection is not sure, based on a taxable turnover of ₹17.4 lakh crore. However, widespread GST evasion at the retail level significantly undermines this potential revenue generation. This article proposes a focused approach to address this challenge, specifically targeting businesses engaged exclusively in Business-to-Consumer (B2C) transactions.  

GST evasion in retail manifests through various means, including underreporting sales, issuing fake invoices, and operating outside the formal tax system. This not only leads to revenue loss for the government but also creates an uneven playing field for compliant businesses. Addressing this issue requires a multi-pronged strategy that simplifies compliance, strengthens enforcement, and leverages technology.  

Current Challenges and Their Impact:

The current GST regime, while designed to streamline indirect taxation, presents certain challenges for small retailers. Complex filing procedures, the need for detailed record-keeping, and the perceived burden of compliance can incentivize evasion, especially for businesses operating on thin margins. The prevalence of cash transactions further complicates tracking and verification, making it easier to conceal sales.  

A Proposed Solution: Mandatory Composition Scheme for B2C Retailers

This article proposes a significant shift in the approach to GST compliance for businesses exclusively engaged in B2C retail transactions. The core of the proposal is to mandate the composition scheme for such businesses.

Rationale:

• Simplified Compliance: The composition scheme offers a simplified approach to GST, requiring businesses to pay a fixed percentage of their turnover as tax, instead of maintaining detailed records and filing complex returns. This significantly reduces the compliance burden for small retailers, making it easier for them to participate in the formal tax system.  
• Reduced Scope for Evasion: By simplifying the process and focusing on turnover-based taxation, the composition scheme reduces the incentive and opportunity for evasion. The fixed tax rate provides greater predictability and transparency, making it harder to manipulate sales figures.  
• Enhanced Revenue Collection: While the composition scheme involves a lower tax rate (typically 1% or 2%), mandatory implementation for all B2C retailers could potentially lead to higher overall revenue collection due to increased compliance and a wider tax base. Our estimated collection under the composition scheme with rates of 1 or 2 % would be 0.174 Lakh Crore. This is based on the same taxable turnover of ₹17.4 Lakh Crore as mentioned earlier.

Implementation Details:

• Eligibility: This mandatory composition scheme would apply to all businesses that are 100% retail, i.e., exclusively engaged in B2C transactions. Clear criteria would need to be established to define "retail" and "B2C" transactions to avoid ambiguity.
• Tax Rate: The specific tax rate under the composition scheme (1% or 2%) would need to be determined based on the nature of the retail business and its average profit margins. A lower rate could encourage greater participation and compliance.
• Monitoring and Enforcement: While the composition scheme simplifies compliance, it is crucial to maintain effective monitoring and enforcement mechanisms to prevent misuse. Regular audits and inspections should be conducted to verify turnover and ensure compliance with the scheme's provisions.
• Technology Integration: Technology can play a crucial role in facilitating compliance and monitoring. Simple and affordable POS systems can be provided to retailers to record sales and generate invoices. These systems can be linked to the GST portal for seamless reporting and data analysis.

Projected Impact:

By implementing this mandatory composition scheme, the following benefits can be realized:

• Increased GST Revenue: As mentioned earlier, the estimated GST collection under the composition scheme is ₹0.174 Lakh Crore. This can be further enhanced by increasing the compliance rate.
• Improved Tax Compliance: Simplifying the tax process will encourage more retailers to join the formal tax system, leading to improved overall tax compliance.  
• Level Playing Field: Mandatory compliance will create a level playing field for all retailers, eliminating the unfair advantage enjoyed by those who evade taxes.  
• Reduced Administrative Burden: The simplified compliance requirements will reduce the administrative burden on both retailers and tax authorities.

Conclusion:

GST evasion at the retail level poses a significant challenge to India's revenue generation and economic growth. The proposed mandatory composition scheme for B2C retailers offers a viable solution by simplifying compliance, reducing the scope for evasion, and potentially increasing overall revenue collection. By combining this approach with strengthened enforcement and technology integration, the government can effectively address this issue and unlock the full revenue potential of the retail sector. The estimated GST collection under the composition scheme is ₹0.174 Lakh Crore. With better enforcement and increased awareness, we can expect increased GST collection in coming years. This will significantly contribute to the nation's economic development.