GST Compliance Rating - Definition, Benefits & How does it work

The GST Compliance Rating is a rating that shows how compliant a registered taxable individual is with respect to filing his/her GST. This rating applies to all taxable entities irrespective of the nature, size or turnover of the business.It is essentially similar to a performance ranking system. A rating system can be created, for example, on a scale of 1 to 10, with 1 being the least compliant and 10 being the most compliant.Do note that the above example was used for demonstration only, and the actual parameters of the GST compliance system have not yet been made public.

The main goal of the GST Compliance Rating is to encourage taxable entities to be adequately GST compliant and punctual with their invoice submissions and upload other documents. Many GST components are interdependent on each other, and it is paramount that the process is streamlined to save time.For example, Input Tax Credit can be claimed by a person under GST using GSTR-2 only after the seller has filed GSTR-1. Additionally, the details in both these forms must match.But under the current regime, sellers often delay filing their GSTR-1 and this, in turn, delays the input tax credit across the chain. That is where the compliance rating system comes in. It will compel sellers to be more GST compliant.

The criteria for GST compliance have still not been made public. But, in general, most experts believe the following parameters may be used for the GST compliance ratings:

• Payment of taxes on time
• On-time return filings
• On-time reconciliations
• Compliance with other limits with respect to GST
• Cooperation with GST authorities.

The GST Compliance Rating is expected to work on the basis of offering benefits to those with a higher rating. Refunds applicable to the taxpayer may be paid on a percentage basis with regards to these ratings.For example, let’s assume a taxpayer has a compliance rating of 8, and he/she is eligible for a tax refund of Rs. 10,000. Based on his/her high rating, the taxpayer may get an instant provisional refund of Rs. 8,000. The remaining balance will be paid after the due diligence.Similarly, a person with a lower rating of 6 may not enjoy the same benefits. They may get only 60% of the refund instantly. Please note that these parameters are for demonstration since the exact compliance system hasn't yet been officially notified.

The GST compliance rating system will also allow those with higher ratings to avail other benefits. For example:

• They’ll get their refunds immediately.
• Buyers may get input tax credit immediately.
• Higher GST compliance will attract more business.
• When you’re GST compliant, you reduce the chances of tax audits.
• You can enjoy a better reputation if your GST compliance is high.

Businesses stand to gain a lot due to the GST compliance rating. Let's understand this with the help of an example-Suppose Ravi requires office supplies and is looking at 2 sellers, A and B. Seller A has a compliance rating of 9, whereas Seller B has a rating of 6.Ravi hears that Seller B doesn't file their GST returns on time. Hence, the input credit is blocked. Seller A has no such issues. Therefore, they’re more compliant with a higher rating. Naturally, Ravi chooses to purchase office supplies from Seller A because of their higher compliance rating.The effect on the buyer would be that they would look for sellers with a higher rating to get their input credit faster. The impact on the seller would be that they would attract more buyers if their compliance ratings are high. The GST rating will encourage healthy competition between businesses since prospective customers would enquire about their ratings before approaching them for business.

Since the ratings directly depend on the compliance of businesses, small and new businesses that are prone to errors and delays in filing will face the burden of low ratings. They won’t have the resources to be fully compliant. Hence, this type of rating system could be a disadvantage to them. Lower ratings could affect their businesses.Larger players, on the other hand, would have the necessary resources to earn higher ratings by being fully compliant. This will naturally distinguish them from other competitors.

The GST compliance rating would be updated periodically, and the same would be conveyed to the taxpayer in question. The rating would also be available publicly, and any buyer or customer could potentially check the rating before approaching a vendor. It's recommended to be GST compliant to gain benefits.Ready to make the most of your money? Start your tax planning journey now!

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.