CHENNAI:The owner of an ethnic wear boutique in the city looked nonplussed, his face a font of disbelief while reading his store’s performance report based on internal assessment. The numbers paled in comparison to his competitors’. He hired chartered accountants to audit. The outcome showed that many companies were finding ways and means to wriggle out of paying the prescribed Goods and Services Tax (GST) for their enterprises and products.
The proprietor of the store learned that his competitor was making full use of a small clause in the GST law to make money.Under GST, all goods transacted in India are classified under the HSN (Harmonized System Nomenclature) code system. Based on that, GST rates are fixed in five slabs — NIL, 5%, 12%, 18% and 28%.
Knitted apparel and clothing fall under chapter 61 of the HSN code. Apparel and clothing that are not knitted fall under chapter 62 of the HSN code. Under both categories, any piece of apparel or clothing would be taxed at 5% GST if the taxable value of the goods does not exceed `1,000 per piece. All types of apparel and clothing of sale value exceeding `1,000 per piece would be taxed at 12% GST.
“What he did was, he sold one metre of cloth at `999 so that it could be taxed at 5% rather than at 12%, which our client was charging. So if a customer wanted three metres of cloth, the competitor would bill it as three units at `999, which was lower than the price that the other boutique owner was selling it at. So he lost a lot of clients who felt it was a better deal to buy from the other shop as it was priced at a more attractive rate because of lower GST on garments,” said S Ramkumar, senior director at Sundaram and Srinivasan Chartered Accountants, who handled the audit.
However, this is not restricted to only to textiles, experts said. Another company imports Malaysian beauty products and operates out of a considerably rundown mall in the city. CE interacted with the distributor of the product to find out how he managed to pay from a lower tax slab.
“I just registered myself as a company that deals in ‘herbal products’ because when you register as a regular beauty products company, you have to pay a higher GST. Herbal products are taxed at 12% whereas other beauty products are taxed at either 18% or 28% depending on the brand and ingredient specifications,” the distributor said.
When owners and distributors find loopholes, it not only gives their companies an unfair advantage but also poses a risk of customers being cheated. “The magnitude of companies indulging in these malpractices is alarming. It is often done in subtle ways so it gets harder to recognise such fraudulent activities. While the GST law provides for remedial measures, there is a lot of confusion surrounding the law as such, even though it has been quite a while since the single tax regime has been in operation,” said another chartered accountant who did not wish to be named.
The GST law provides for an anti-profiteering committee to look into matters where the benefit of a reduction in tax is not passed on to consumers. “This would mean that if the benefit of the relaxation in tax on sanitary napkins is not passed on to the consumer, the anti-profiteering committee steps in and penalises the company,” said a senior official of the commercial taxes department.
The official added that when companies register themselves wrongly, it is considered as evasion. “Generally, we notice discrepancies when companies submit their returns or when a complaint is forwarded to us. We have not started return scrutiny, yet, but have received about two complaints in the Chennai-I division (north and central Chennai) in the last few months regarding GST that we have looked into. There is no clear data on hand to state that evasion has gone up since GST,” the official said.