What is GST Compliance Rating?

Updated on: May 10th, 2022


2 min read

GST ushered in a new India on 1st July 2017. Never has India seen such a huge tax reform before. GST has also brought in new concepts such as mixed and composite supply, time of supply and most importantly the GST Compliance Rating.

What is GST Compliance Rating?

Simply put, the GST compliance rating is akin to a performance ranking of all registered taxable persons which tells you how compliant they are with respect to the GST provisions. This will be irrespective of nature, size, or turnover of the business. For example, a rating system can be devised on a scale of 1 to 10,  with 10 being the highest compliant and 1 being least compliant. Please note that the actual rating system has still not been notified.

Why is the GST Compliance Rating being introduced?

The idea behind this concept of tax administration is to compel people to be fully GST compliant and on time with uploading invoices and other necessary documents. Under GST, a person can claim input tax credit in GSTR-2 (return with purchase details for the month) only when the seller has also filed his GSTR-1 (return with monthly sales details), and the details on both these forms match or reconcile with each other. Under the current regime, businesses often delayed filing return and payment of taxes to gain time. Continuing this practice under GST will result in a delay in input tax credit across the chain and severely affect the working capital of businesses. The rating system will prevent the delay of credit for bona fide buyers due to the non-compliance of certain persons.

How will someone be rated under GST?

GST Rating will be based on certain criteria which are yet to be prescribed. However, experts believe that the following factors could play a key role in deciding compliance ratings:

  • Timely payment of taxes
  • Timely filing of returns
  • Timely reconciliations
  • Compliance with various other time limits under GST
  • Cooperating with the GST authorities

How will the GST Rating work?

Based on your rating, you and your business will enjoy certain benefits. It has been proposed that refunds to a taxpayer will be made on a percentage basis of these ratings. Let us take an example. Supposing a taxpayer has a rating of 8. He is eligible to claim a refund of Rs. 10,000. Based on his compliance rating (which is 8), he will get an instant provisional refund of Rs. 8,000 when he applies for a refund. The balance of Rs. 2,000 will be paid later after scrutiny. Similarly, a person with a rating of 6 will get only 60% of refund. Only a person with a minimum of GST rating of 5 on 10 can avail provisional refund. Note: The rules regarding this are yet to be notified.

What are the benefits that you can enjoy?

Some of the benefits that compliant vendors may be able to enjoy include:

  • Get refunds immediately
  • Buyers can get input tax credit immediately
  • Attract more business
  • Reduce chances of an audit by the tax authorities.
  • Enjoy better reputation

How will businesses be benefited by becoming GST compliant?

The easiest way to understand this is through an example. Ajay requires office stationery. He has shortlisted 2 sellers – ABC & XYZ. ABC has a rating of 9 whereas XYZ’s rating is 6. Ajay hears from his good friend Vijay that the company XYZ does not file its GST returns on time resulting in input credit being blocked, while the company ABC is well rated and highly compliant. Based on his friend’s suggestions and the vendor’s ratings, Ajay places an order with the company ABC.

Effect on buyer: Buyers will look for sellers with a higher rating which will ensure they can avail input tax credit faster.

Effect on sellers: Sellers with a higher rating will attract more customers. Thus, the GST rating will bring in a healthy competition between businesses. A prospective client will inquire about the compliance ratings of suppliers before entering deals.

What are the disadvantages of this rating scheme?

Businesses will need to be compliant in order to remain competitive. This may prove to be a burden especially to the small businesses who do not have the resources to be fully compliant; at least in the initial days. GST is a completely new tax regime and businesses will inevitably be prone to errors.

Errors, delays, and non-compliance will affect the vendor’s rating, and therefore the business may suffer. On the other hand, compliant vendors will be at an advantage as they will be easily distinguished from their competitors. This will also prove beneficial to the large players who have more resources at their disposal.

How will you know your GST rating?

The compliance rating score will be updated periodically. It will be intimated to the taxpayer and also be available publicly.

How can ClearTax help in your rating?

ClearTax has developed a cloud-based secure GST software that can help your business be GST compliant. On syncing with your accounting software, our software will directly take information from your sales and purchase invoices and automatically fill up your GSTR-1 and GSTR-2 return forms. Thus, you can immediately file your GSTR-1 & GSTR-2 through our software.  This will help you to file error-free returns on time and ensure a high rating for your business.

ClearTax has also launched a GST Bill Book which will help you to issue GST compliant invoices. You can also upload them on ClearTax GST software and file your returns. Our Finance Minister, Mr. Arun Jaitley has rightly said that India is largely a non-compliant country when it comes to taxes. Thus, GST rating is a brilliant scheme which will urge businesses to become more compliant and help to prevent tax evasion.

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