This is how GST and Direct Tax are connected

GST is called out as one of the biggest economic reforms not only because it led to subsuming of multiple indirect taxes into one but also because this Indirect tax regime has contributed in increasing the collection of Direct Taxes.

As quoted by the Finance Minister, “The GST-direct tax relationship is a very curious one. Because of the GST, there is a direct impact on the income tax side also. The rationalizing of the GST tariffs increased the profitability of some companies and because of which the corporate taxes have gone up.”

Let’s understand how direct taxation and GST are interlinked

There are several dots that connect them together:

·         During the previous days of the indirect tax system, information sharing was difficult. The Income Tax (IT) Department didn’t have access to the data which is filed under Central Excise, Service Tax and various state VAT laws. With the advent of GST, the IT department can monitor information related to businesses. The system has brought a lot of transparency in the system, leaving tax evasion as not impossible yet a tedious task.

·         The digital system GSTN makes it possible for a taxpayer to manage all GST related things from a single portal such as maintaining proper tax records, documentation of receipts and expenditures, which in turn help the Income-tax department in figuring out the tax liability of a particular person or business by comparing their income tax returns and GST returns for total turnover thus identifying discrepancies and tax evaders.

·         Unlike the previous indirect tax system, GST leaves a trail which makes it hard to underreport income or exaggerate expenses. Thanks to data analytics and AI, tax officers don’t have to work through a sea of data to make sense as data analysis tools flash the red flags. Further, it’s imperative to attach GST return with the financials submitted to the income-tax office. Discrepancies if any are assessed further.

·         Under the direct taxes in India, PAN plays a significant role. From bank accounts to ITRs everything is linked with PAN and to top that registrations under GST are also PAN-based, so now the value of total turnover reported in all returns under GST will be reported to the Income Tax Department by GSTN. Taxpayers would be required to reconcile the amount of turnover under GST with the amount as mentioned in the annual financials.

·         As per section 2(13) of GST law, the definition of an Associate Enterprise will be same as defined in section 92A of the Income Tax Act, 1961.

·         As per the provisions, where the registered taxable person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income Tax Act, 1961, the input tax credit shall not be allowed on the said tax component.

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Created on Jan 21st 2019 05:08. Viewed 331 times.

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