What does linking Income Tax and GST mean for you - Keshav R Garg

What does linking Income Tax and GST mean for you

Explains – Keshav R Garg, Partner, K D & Associates

The idea which we had been propagating since long has finally seen light by linking data between income tax department and GSTIN. We feel the next step would be to link banking sector also with data filed with tax authorities. If you are a genuine taxpayer who likes to declare his figures honestly, you may not find yourself in trouble but for others so called smart tax planners, tough times are awaiting. There had been lot of instances where in order to reduce complexity and evade tax, taxpayer preferred to file income tax returns and not GST returns. With instructions flowing to link income tax with GSTIN, those hidden figures would prove to be troublesome. Here are few issues which a taxpayer might have to face:

1.       In case of deviation in turnover as submitted in GST returns and Income Tax, taxpayer has to prepare the detailed reconciliations keeping in mind the GST Valuation rules and Income tax provisions. There is quite difference on treatment of  items in these two laws. Any discount given may be allowed as business expenditure under income tax and at the same it may not be permissible under GST. Or income tax might have been paid on accrued income but for GST the same would be taxed once invoice would be raised. E-way will also work as tool to check the cash sales made to evade tax. There are many other instances which will form part of reconciliation between GST and Income Tax turnover data such as under billing which will lead to more stock, hence more income tax. GST and Income Tax work opposite, a gain in one law may prove higher taxes in another

2.       Not only turnover, but linking income tax and GST would bring your purchases under scanner. The invoices against which you might have claimed ITC in GST might not be allowed under income tax or vice-versa. For example, car repair and maintenance is an expenditure allowable under Income Tax whereas for GST no ITC could be claimed. The issues pertaining to inputs/input services and capital goods procured during the Financial year can bring whole lot of problem for taxpayers. A proper reconciliation between outflow as per income tax and GST needs to be prepared.

3.       The ratio like closing stock, GP ratio, NP ratio which form part of income tax audits can create problems in terms of valuation of closing stock. Since the closing stock had always been a sweet point for taxpayers to play with net profit, but once it gets linked with GST, the luxury would be taken away. Any changes in stock/deviation between these two tax laws would call for additional tax payments in either of the laws. Not only the ratios but the data such as unsecured loans or creditors parked as unsecured loans can now result into reversal of input tax credit in terms of Rule 42 & Rule 43 of CGST Rules 2017.

4.       Those who were planning to escape tax on the incomes like rent, professional fees etc. might have to think twice. As any tax deducted at source and reflected in Form 26AS would immediately call for GST liabilities. Gone are days when the data shall not be synchronised and departments not working in collaborations.

5.       We believe things will not end here but instead after section 9(4) of the GST is made effective again, every expense in audited financial statements shall be either GST paid on forward or reverse charge. The scope for year end adjustments would no more to available. Time has come that taxpayers have to prepare their final data on monthly basis with very little room for making adjustments at later stage.

6.       The classification issues would be huge problems as the terminology for GST and income tax are quite different. The adjustments made in sale for any cash discounts would have to be separately reflected to show it as discounts for purposes of reconciliation with GST. The classification issues would be grave. Mapping the figures under different heads as proposed by Income Tax and GST would be a difficult task.

We feel that in the interest of nation and to stream line tax collection linking of data is a welcome step. This will not only help plug tax leakages but would force the tax evaders to fall in line and follow the tax regulations in right spirit. But in this whole chapter, there is a dire need that tax administrators must sit down and sync the provisions laid by GST, Income Tax and Accounting Standards. Because if that is not done, professionals would certainly find out ways and means to save their clients.

Regards

Keshav R Garg

+91-98880-90008