10 strategies companies use to avoid paying taxes in the GST world
After GST rollout, there have been cases of new structures being created in order to avoid paying taxes. Moneycontrol gives you a lowdown on the techniques used by companies to avoid paying taxes.
The Goods and Services Tax (GST) that was intended to bring a system of one nation one tax is still to complete one month. But there have been cases of new structures being created in order to avoid paying taxes. Moneycontrol gives you a lowdown on the techniques used by companies to avoid paying taxes:
Inter-state movement: Companies use this technique to move goods from one state to another state. Once the vendor in the state which receives the good claims input credit the vendor in the state who sells it vanishes.Stay small: Tax experts said that smaller companies with a size of Rs 50 crore or below are more difficult to track. Hence, they stay small and redirect revenues into personal accounts.
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Engage small tax firms: The big four accounting firms look at client reputation before working with them. Hence, these companies would have smaller chartered accountants to manage their accounts.
Cash transactions: Cash does not leave a trail behind. Hence, companies have been found to deal heavily in tax so that they can avoid taxes. While several companies are still in the process of implementing GST, it is likely that transactions will go completely electronic.
Billed versus unbilled revenue: Several smaller entities including pharmacies and grocery chains do not prepare bills for transactions. Only those who insist on them are given bills. This can be used to hide revenue earned as long as the cash is not deposited in bank accounts.
Backdate transactions: One of the most common methods used to avoid paying taxes is to backdate the transaction to a particular day which is convenient to both the payer and the claimant.
Changing product category: One of the mechanisms which some companies use to avoid paying taxes or cut down on tax is to change the category of product that they manufacture. GST tax rates have been revised for 80,000 items in the country depending on the type of product and the ingredients used in its manufacturing. Hence, a chocolate could be categorised as a toffee, cocoa-filled confectionary, candy, biscuit or wafer-coated biscuit.
Threshold exemption limit: Those with a turnover of Rs 20 lakh or below are exempt from GST. Smaller tax consultants are also seeing a demand for splitting larger businesses into smaller multiple units to claim tax relief.
Trade in exempted goods: Several products including puja products, khadi, agricultural equipment, earthen pots and local handicrafts are exempt from taxation. Tax experts said that entities, especially, in South India, dealing primarily in puja articles and products, have been seen to change the category registration to ‘religious articles’ to avoid taxes.Change registration location: Underdeveloped areas like the North-East have access to tax holidays as an incentive. Companies operating in those areas are also giving tax-breaks to boost their business which is in fact misused by smaller entities to incur zero taxes. Often these ‘registered offices’ are unmanned and exist only on paper.