Coping with GST

SMEs, not used to com­plex pa­per­work and laws, will have to rein­vent them­selves if they have to sur­vive un­der the GST regime.

Business Today - - FRONT PAGE - BY DI­PAK MON­DAL

Vi­jay Prakash Jain, 75, a trader and na­tional gen­eral sec­re­tary of a traders’ as­so­ci­a­tion, the Bhar­tiya Udyog Vya­par Man­dal, has not let his phys­i­cal frail­ties weaken his re­solve to fight for traders. Jain, who trades in gro­ceries, chem­i­cals and dry fruit, and also runs a travel and tourism busi­ness from the nar­row lanes of Darya­ganj in old Delhi, is gear­ing up for an­other bat­tle – adapt­ing to the Goods and Ser­vices Tax or GST. GST pro­vi­sions, he says, are so com­plex that even though all the pro­cesses are on­line, he will not be able to file re­turns on his own. He will have to hire a char­tered ac­coun­tant. “Our com­pli­ance cost rose dur­ing the shift from sales tax to VAT (value-added tax). Now that we are go­ing from VAT to GST, it will go up again,” he says.

Like Jain, many small traders and own­ers of mi­cro, small and medium en­ter­prises, or MSMEs, are fac­ing the up­hill task of pre­par­ing for the new GST sys­tem that will come into force from July 1. This is be­ing called one of the big­gest tax re­forms that will make busi­nesses stronger and tax ad­min­is­tra­tion & com­pli­ance eas­ier. It will also plug in­di­rect tax leak­ages by bring­ing into the for­mal econ­omy a large part of the in­for­mal sec­tor, in­clud­ing small traders and many MSMEs. How­ever, for MSMEs and small busi­nesses, ad­just­ing to the sys­tem will in­volve huge costs (see Challenges Ahead). They may even lose busi­ness, as the new sys­tem of seam­less in­put credit en­cour­ages com­pa­nies to do busi­ness with play­ers whose com­pli­ance record is per­fect or at least near per­fect. The sys­tem has been de­signed in such a way that un­less the records sub­mit­ted by all the par­ties in the sup­ply chain match, no party will be able to claim in­put credit. For now, though, this is not the big­gest headache

for MSMEs.

The Prob­lems

GST has been de­signed keep­ing in mind large busi­nesses and ig­nor­ing the prob­lems that small busi­nesses may face, says V.K. Bansal, Pres­i­dent, Fed­er­a­tion of In­dian Small Busi­ness. The big­gest has­sle is fil­ing three re­turns a month. “Few MSMEs have the tech­no­log­i­cal where­withal to file three re­turns a month and then re­vise them in case of any er­ror within the stip­u­lated time. Many MSME own­ers still do not have Tally pack­ages,” says Bansal, the pro­moter of Nex­gen In­fos­ys­tem and Nex­gen Ex­hi­bi­tions. Tally is one of the most com­monly-used ac­count­ing soft­ware used by small busi­nesses in In­dia.

When GST was con­ceived, as a one-na­tion-one-tax, ease of com­pli­ance and ad­min­is­tra­tion were sup­posed to be its essence. What the coun­try has got is far more com­plex with com­pli­ance re­quire­ments that are cum­ber­some if not dra­co­nian. This was, say experts, made worse by the rush to pass dif­fer­ent rules un­der the Act so that the new regime can be rolled out from July 1, 2017, just two-anda-half months from now.

Ar­chit Gupta, CEO and Co-founder, ClearTax, says most small busi­nesses are un­aware of the enor­mous com­pli­ance bur­den GST will bring – right from rais­ing in­voices to fil­ing re­turns. ClearTax is of­fer­ing a bou­quet of GST com­pli­ance and ad­vi­sory ser­vices.

“GST pro­vi­sions are fairly com­plex and, there­fore, for smaller busi­nesses to read, in­ter­pret, un­der­stand and ap­ply them will take a bit of time. They are not used to such level of com­plex­i­ties. Even smaller char­tered ac­counts who SMEs con­sult are strug­gling to un­der­stand the laws,” says M.S. Mani, Se­nior Di­rec­tor, In­di­rect Tax, Deloitte In­dia.

Tens of Re­turns

Un­der GST, all tax­able en­ti­ties will have to file three monthly re­turns and one an­nual re­turn, all within a stip­u­lated pe­riod. One re­turn is for out­ward sup­plies of tax­able goods and/or ser­vices ef­fected, an­other for in­ward sup­plies, and the third one is for fi­nal­i­sa­tion of de­tails of out­ward sup­plies and in­ward sup­plies along with the pay­ment of the tax.

This comes to 37 re­turns a year. And this is for an en­tity that op­er­ates in only one state. If the en­tity has op­er­a­tions in more than one state, the num­ber will mul­ti­ply. Every tax­payer will have to get it­self reg­is­tered in each state where it has an op­er­a­tion.

In com­par­i­son, VAT re­turns are filed quar­terly (for pro­pri­etary firms,limited li­a­bil­ity part­ner­ships and part­ner­ship firms) and ser­vice tax re­turns once in six months. GST will re­place both VAT and ser­vice tax.

Fil­ing three re­turns a month is not the only chal­lenge. Each and every in­voice raised will have to be up­loaded on the GST Network ( GSTN), the com­pany floated to build and main­tain the IT in­fra­struc­ture. This means digi­ti­sa­tion of

all in­voices. Also, the in­voic­ing mech­a­nism may have to be changed; this is es­pe­cially true for MSMEs that are right now ex­empt from ex­cise or VAT due to higher turnover thresh­olds in the cur­rent sys­tem.

An­other prob­lem is that tax pay­ers will have to spec­ify the place of sup­ply in the in­voice. Tax experts say de­ter­min­ing the place of sup­ply is a te­dious job. Prod­uct cod­ing through HSN (har­monised sys­tem of nomen­cla­ture) is also not go­ing to be easy. HSN is an in­ter­na­tion­ally stan­dard­ised sys­tem of names and num­bers to clas­sify traded prod­ucts.

“At present, MSMEs ex­empt from ex­cise duty be­cause of turnover of less than `1.5 crore is­sue in­voices in a sim­ple for­mat – they give de­tails of prod­ucts and VAT ap­pli­ca­ble to them. But af­ter they come un­der GST (many will, since the thresh­old for GST is `20 lakh), they will have to men­tion both the HSN code and the place of sup­ply in in­voices,” says Naveen Wad­hawa, Deputy Gen­eral Man­ager, R&D, Tax­mann.

Ac­count­ing Trou­ble

MSMEs which come un­der GST will have to get their ac­counts au­dited. Many are right now avail­ing of the ben­e­fit of the pre­sump­tive tax­a­tion scheme un­der which any en­tity with an­nual turnover of up to `2 crore is not re­quired to main­tain books of ac­count and are taxed at 8 per cent of their turnover. Now, such busi­nesses may not only lose the ex­emp­tion, but will also have to main­tain books as per the coun­try’s ac­count­ing rules.

Also, the en­tire process – reg­is­tra­tion, rais­ing of in­voice, fil­ing of re­turns and claim­ing of re­fund – will be on­line. Small busi­nesses may have to ei­ther buy soft­ware so­lu­tions such as Tally and Marg or take help from web­sites such as ClearTax. All this will add to the cost of run­ning the busi­ness, though GST Network has de­vel­oped an off­line tool for these tasks. The tool can be used for up­load­ing in­voices, down­load­ing GST re­turn forms and copy­ing pur­chase data of sup­pli­ers and buy­ers.

“While we do not pro­vide spe­cial ser­vices for any par­tic­u­lar cat­e­gory of tax­pay­ers, our off­line tools will help SMEs. Any tax­payer can down­load and use them to up­load in­voice data and down­load GST re­turn forms. While large cor­po­ra­tions will have their ERP (en­ter­prise re­source plan­ning) sys­tems, the smaller ones can use this tool,” says Naveen Ku­mar, Chair­man, GSTN.

Work­ing Cap­i­tal

A buyer will not be able to claim in­put tax credit un­less the tax charged in re­spect of such sup­ply has been paid by the seller. So, an en­tity that has paid tax will have to de­pend on com-

Naveen Ku­mar Chair­man, GSTN “SMEs can use our off­line tools. Any tax­payer can down­load them. That will help them up­load their in­voice data and down­load GSTR-2. They can also copy pur­chase data from the sys­tem to com­pare with their own pur­chase data”

pli­ance by its sup­pli­ers to claim tax cred­its. This means if the sup­plier fails to pay tax, the buyer will not get in­put credit. This means that the sup­plier which col­lected tax from the buyer has to de­posit the tax every month. The credit will also get blocked in case of any mis­match in re­turns filed by the seller and the buyer. “Imagine the prob­lem a small buyer can face in get­ting a large seller to file a re­turn or get­ting it cor­rected,” says Naveen Wad­hawa of Tax­mann.

That’s not all. The whole process of get­ting in­put credit it­self takes a long time. If tax is paid in the first week of the month, the in­put credit will not be avail­able till the 15th of the next month, the dead­line for fil­ing re­turns. This could mean block­ing of cap­i­tal for over a month.

Also, there are three dif­fer­ent taxes un­der GST – IGST, CGST and SGST. Pay­ment un­der the wrong head means the en­tity will have to first make pay­ment un­der the cor­rect head and then claim re­fund for the ex­tra tax paid.

Loss of Busi­ness

The con­di­tion for claim­ing in­put tax credit will put many small en­ti­ties at the risk of los­ing busi­ness. Since the law put the onus of en­sur­ing that sup­pli­ers pay tax and file re­turns on time on buy­ers – as non-pay­ment will de­lay in­put credit – large buy­ers will shift their busi­nesses to more com­pli­ant sup­pli­ers. Smaller en­ter­prises risk los­ing busi­ness to bigger play­ers that have the where­withal to bet­ter com­ply with the GST rules. San­jay Bha­tia, Pres­i­dent, FICCI- Con­fed­er­a­tion of MSME, says claim­ing in­put tax credit it­self will be­come a cum­ber­some process as many small sup­pli­ers may not be tech­savvy enough to file re­turns ac­cu­rately. Be­cause of their non-com­pli­ance, the buyer will suf­fer, he says.

This, he says, will hit the busi­ness of small deal­ers, as no­body would like to deal with small busi­nesses due to fear of non-com­pli­ance by them. This will lead to more de­pen­dency on larger play­ers and, there­fore, cre­ate a sit­u­a­tion of mo­nop­oly in the mar­ket, he says.

There is an­other pro­vi­sion that may lead to loss of busi­ness for smaller en­ti­ties. The Cen­tral GST rules say if the sup­plier is not reg­is­tered un­der GST, all the tax the sup­plier is li­able to pay has to be paid by the buyer. Now, any small busi­ness with a turnover of less than `20 lakh is not re­quired to be reg­is­tered un­der GST. This means no buyer would like to do busi­ness with it. “This will dis­cour­age reg­is­tered units/com­pa­nies to buy from these un­reg­is­tered units. This will wipe out these mi­cro & small play­ers,” says San­jay Bha­tia.

The MSME sec­tor and the trad­ing com­mu­nity are the back­bone of our econ­omy. The MSME sec­tor alone ac­counts for 40 per cent of our gross do­mes­tic prod­uct and of­fers em­ploy­ment to over 130 mil­lion peo­ple. GST, with its many com­plex­i­ties and com­pli­ance norms, may have a dis­rup­tive ef­fect on it. Only time will tell how well it copes with the changes star­ing at it. ~

Ar­chit Gupta Founder and CEO, ClearTax.com “Most small busi­nesses are un­aware of the enor­mous com­pli­ance bur­den GST will bring. Even if a busi­ness is based only in one state, the num­ber of re­turns it has to file in a year is 37. The bur­den will in­crease im­mensely”

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