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March 25, 2021

CAG Report : GST Simplification yet to be achieved

by facelesscompliance in GST

CAG Report : GST Simplification yet to be achieved

Compliance Audit Report of the Comptroller and Auditor General of India on Goods and Services Tax, Central Excise and Service Tax revenue (Report No. 1 of 2021) for the years ended March 2019 and March 2020 was presented in Parliament on 24 March 2021.

This Report contains significant results of the compliance audit of Central Board of Indirect Taxes and Customs (CBIC) under the Department of Revenue, and Information Technology audit of Goods and Services Tax Network (GSTN). The report contains audit findings relating to Goods and Services Tax and legacy Indirect Taxes viz. Central Excise and Service Tax.

CAG noticed that owing to the continuing extensions in the roll out of simplified return forms, and delay in decision making, the originally envisaged system-verified flow of ITC through “invoice matching” is yet to be implemented and a non-intrusive e-tax system still remains unimplemented. The GST return system is still a work in progress despite more than three years of GST roll out. In the absence of a stable and simplified return mechanism, one of the main objectives of roll out of GST i.e. simplified tax compliance system is yet to be achieved.

CBIC has yet to put in place an effective system of scrutiny of returns based on detailed instructions/manual for the tax officers. As a result, an important compliance function of the department, as mandated by law, is yet to be effectively rolled out even after three years of GST implementation.

CAG undertook IT audit of GSTN (Phase-II) to assess whether the Refund and Returns modules implemented by GSTN were in line with the provisions of the Acts and Rules governing the GST regime and the System Requirements Specifications (SRS). In addition, E-Way Bills module, which has been developed by National Informatics Centre, under the supervision of GSTN was also reviewed.

In 14 cases, the key validations / functionalities as existing in the rolled out modules were not found aligned to the applicable provisions even though SRS was correctly framed.

CAG verified 5,822 out of 77,363 transitional credit cases in 81 Central GST Commissionerates and five Audit Commissionerates, and noticed 1,182 instances (20 per cent) of non-compliance. We examined the records relating to 4,736 refunds out of 23,106 in 33 CGST Commissionerates and  noticed non-adherence to extant provisions in processing of refunds in 280 claims (6 per cent) involving an amount of Rs.16.16 crore.

CAG had examined the SCN and adjudication process of the department and noticed significant deviations from law/rules such as incorrect computation of demand in SCNs, late issuance of SCNs, delay in adjudications etc. during audit of SCNs that were pending for adjudication as on 31 March 2019.

Executive Summary

Chapter I: Indirect Taxes Administration

In the CAG’s first Audit Report1 on Goods and Services Tax (GST), we noted the landmark achievement of the Government and other stakeholders in roll out of GST. We had further noted that an area where full potential of GST had not been achieved was the simplified tax compliance regime. The originally envisaged system-validated Input Tax Credit (ITC) through “invoice matching” had not been implemented. The complexity of return mechanism and technical glitches had resulted in roll-back of key GST returns, rendering the system prone to ITC frauds. Accordingly, we had recommended simplified tax compliance regime by introducing simplified return forms duly using technological solutions.


During the current audit, we noticed that owing to the continuing extensions in the roll out of simplified return forms, and delay in decision making, the originally envisaged system-verified flow of ITC through “invoice matching” is
yet to be implemented and a non-intrusive e-tax system still remains unimplemented. The GST return system is still a work in progress despite more than three years of GST roll out. In the absence of a stable and simplified return
mechanism, one of the main objectives of roll out of GST i.e. simplified tax compliance system is yet to be achieved.


It is recommended that a definite time frame for roll out of simplified return forms may be fixed and implemented as frequent deferments are resulting in delay in stabilisation of return filing system and continued uncertainty in the
GST eco-system

Indirect Taxes collections increased by ` 16,627 crore during FY20 over FY19. However, there is a declining trend in annual growth of Indirect Taxes during the last five years. The annual growth of Indirect Taxes (Y-o-Y) declined from
21.33 per cent in FY17 to only 1.76 per cent in FY20. Further, share of Indirect taxes in total revenue receipts declined from 38.95 per cent in FY17 to 36.92 per cent in FY20. Central GST taxes revenue as percentage of GDP declined from 3.08 per cent in FY 19 to 2.95 per cent in FY20.

Chapter II: Audit Mandate, Audit Universe and Response to Audit

A very large number of audit observations were pending for compliance in the Local Audit Reports as on 31 March 2019. Department’s response to these audit observations was intermittent and not substantive leading to persistent
accumulation of outstanding paras. Department had not furnished reply to 52 per cent (13,475) of total LAR audit paras, pending as on 31 March, 2019, reflecting lackadaisical approach of the Department in replying to audit observations. Reply of the department in 6,474 (48 per cent) paras was pending for more than three years, as on 31 March 2019.

Chapter III: IT audit of GSTN

IT audit of GSTN (Phase – II) was undertaken to assess whether the Refund and Returns modules implemented by GSTN were in line with the provisions of the Acts and Rules governing the GST regime and the System Requirements
Specifications (SRS). In addition, E-Way Bills module, which has been developed by National Informatics Centre, under the supervision of GSTN was also reviewed.
In 14 cases, the key validations / functionalities as existing in the rolled out modules were not found aligned to the applicable provisions even though SRS was correctly framed.

Refund module


Absence of adequate controls, risk of claiming refund on unverified ITC and deficiencies in integration of GST Portal with the Indian Customs EDI Systems (ICES) application for IGST refund on export of goods resulted in following
deficiencies in Refund module:


• Due to GSTR 2 and 3 being held in abeyance, the envisaged buyer seller reconciliation mechanism could not be implemented resulting in unmitigated risk in the GST refund system.

Non re-crediting of ITC ledger of taxpayers where Deficiency Memo was issued on second and subsequent occasion.

• The refund of ITC sanctioned was disproportionately more than the actual value of export in case of export without payment of tax (Letter of Undertaking).

• Verification of endorsement detail of invoices of supplies to SEZ with SEZ online was not made mandatory while processing the refund application.

• Due to non-implementation of “With-hold” request functionality at back office there is a possibility of further refunds to the non-compliant exporters.

• Absence of auto–exclusion functionality to deduct the ITC of Capital goods could lead to excess refund being claimed.

• Lack of validation in the system to verify the turnover of inverted rate of supply in Statement-1 with the corresponding entries as provided in Statement-1A could lead to excess claim of refund.

Download the complete Executive Summary and Report from below Link