Soft Nudge, Keen Watch: How The Govt Will Keep Indirect Tax Compliance On Track

(MENAFN- Live Mint)

India's top indirect tax body wants to strictly avoid aggressive enforcement, preferring a "soft nudge" approach to encourage tax compliance instead. Alongside, it will tally income tax returns with goods and services tax (GST) returns to check for potential mismatches, and watch out for an abnormal use of input tax credits to check evasion.

Tax officers should avoid going on an overdrive with any single enforcement method or sending premature notices that create fear among businesses, Central Board of Indirect Taxes and Customs (CBIC) chairman Sanjay Kumar Agarwal said. The message comes in the context of some of the states leveraging digital transaction data to send tax notices to small vendors, leading to a backlash.

“I think there should not be any kind of overdrive on a particular method like payments which are received through unified payment interface (UPI). While there's no harm in taking data, its use in follow-up actions should be very carefully calibrated. Notices should not be sent immediately, even for seeking explanations, as this creates a scare in the entire segment", Agarwal said in an interview.

UPI data

Vendors in Karnataka protested in July after state tax authorities issued notices as digital payments received by many of them exceeded the sales threshold for GST registration. Some of those who received the notices were selling vegetables, which are exempt from GST. Central GST authorities have not issued such notices.

Agarwal cautioned against what he called "scare tactics", adding central GST authorities are adopting a persuasion-based approach where discrepancies are detected between GST returns and income-tax returns.

Sellers of goods worth more than ₹40 lakh a year within a state and ₹20 lakh in cross-border sales are required to register for GST. There is a simplified registration and quarterly return filing scheme for small businesses for ease of compliance.

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“By cautioning against an overdrive on UPI-linked data, the emphasis is on balancing data analytics with fairness. A“soft nudge" approach, rather than aggressive scrutiny, signals that the tax department seeks to build trust and guide businesses towards compliance instead of immediately resorting to coercive action. This approach is particularly relevant in the context of India's expanding digital payment ecosystem, where genuine small businesses should not be burdened with disproportionate enforcement," said Rajat Mohan, Senior Partner at AMRG & Associates.

Evasion

Authorities detected ₹7 trillion worth of GST evasion in 91,000 cases in five years through March 2025. Of this, ₹1.78 trillion was fraud relating to input tax credits (ITC), where merchants secure refunds for tax-paid raw materials and services.

The central government is undertaking a drive under which businesses making very little tax payment in cash, paying almost their entire tax liability through ITC are identified and their GST returns matched with their Income Tax returns, Agarwal said.

Paying nearly all of the final tax liability using tax credits implies the business is claiming very low profit margins and therefore, very makes very little GST payments in cash. The tax authority considers it as a risk parameter warranting a closer look for any artificial inflation of available tax credits or under-reporting of value addition.

“How they have reported their income in their I-T returns and whether it matches with what they have reported in GST returns, have been looked into," said Agarwal.

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“In fact, we are able to identify that they have not discharged their tax liability properly by way of making payments in cash. Then, they have started making more tax payments in cash than by utilizing input tax credits. This kind of approach is being adopted by the central administration to improve compliance and revenue receipts."

“This is being done in this financial year. We are taking a very calibrated approach, mostly a 'soft nudge approach' so that we can show businesses that this kind of data is available with the department and they should voluntarily come forward and start making tax payment correctly. By this nudging exercise, collections will improve," explained Agarwal.

Matching returns

Matching GST returns with I-T filings is a significant compliance tool, added Mohan of AMRG & Associates.

“Businesses showing heavy reliance on ITC while paying negligible cash tax will come under review, as such patterns often flag potential evasion," said Mohan.

Cross-verification of indirect and direct tax data will improve transparency, ensure consistency in reporting, and discourage dual under-reporting of income and turnover, he said. When coupled with a nudge-based strategy, this data-driven monitoring can expand the tax base while maintaining taxpayer confidence and minimizing friction in the compliance process, added Mohan.

Saurabh Agarwal, tax partner at EY said the ongoing effort to reconcile sales and purchases reported under I-T and GST returns will be a transformative step for the economy. This initiative, powered by the Digital India push and the rich data available through GSTN and TRACES, is more than just a compliance check, it's a strategic move to build a more formal and transparent business ecosystem, Agarwal said. TRACES is a portal managed by the Income Tax department.

“By leveraging Big Data, we can now seamlessly cross-reference a company's GST filings with its I-T declarations, ensuring consistency and integrity," added Agarwal of EY.

Data convergence

This convergence of data is a powerful tool, he said, adding that it is designed to minimize discrepancies and to create a level playing field for everyone.

“For honest businesses, this integration will simplify compliance in the long run, as their records will be consistent across platforms. For those who have been operating in the shadows, it will become increasingly difficult to do so," Agarwal of EY said.

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“This push for formalization will expand our tax base, bringing more businesses into the organized economy and boosting government revenues. It is now up to businesses to increase their digital footprint and ensure that the data reported in any of their government filings is reconciled with each other to avoid scrutiny from the tax administration and ensure certainty of taxes," added Agarwal of EY.

India's combined GST collection by the Centre and states hit a record ₹22.08 trillion in FY25, an annual increase of 9.4%. While the recent GST cuts and the elimination of two tax slabs are estimated to cost ₹48,000 crore, the Centre believes the resultant rise in consumption will offset it this year itself.

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