Goods and Services Tax: How GST will change the way businesses operate in India
GST: As India braces for its biggest tax reform since Independence in the form of the Goods and Services Tax (GST), there are many apprehensions among the business community – ‘how’ and ‘what’ primary among them. While consumers are mostly concerned with the change in prices after the GST comes into effect on July 1, businesses, small or big, have to undertake a complete overhaul of their system and change the way they have carried out trade so far. There is no denying the fact that starting 12:00 am, July 1, 2017, from migration to registration under GST, from a new accounting software to passing on benefits of lower tax to consumers, a lot will change after the new tax regime comes into effect.
On the other hand, companies, small or large, have complained that they are not yet GST-ready but government’s absolute refusal to budge on the launch date ultimately forced them to expedite the process. The fact that they believe the GST will make conducting business easier has also come as an incentive for them to accept the change. The jury is still out on the practical implications of the GST, but one thing is certain- it will change the way businesses operate in the world’s fastest growing economy.
Here are some of the major changes that Indian businesses will go through after GST comes into effect:
There will be a number of changes that the businesses need to make to their system to operate under the GST. Medium and Small Industries have often operated as informal sector, without following due procedures and compliance to regulations. That will change now. It has become inevitable for the SMEs to take their system online for conducting business. The system must be ready for billing, invoices, returns, input tax credit and other such actions under the GST. Existing systems need to be overhauled, Standard Operating Procedures (SOPs) need to be revised and training modules for employees need to be updated as per the GST framework.
For decades, India has had multiple layers of taxation that varies from state to state -- excise, sales tax, Value Added Tax (VAT) and service tax, to name a few. However, that will soon change as these are replaced by one tax which will be same across the state borders. To make this transition, business will need GST-compliance accounting solutions. From big MNCs like Microsoft to independent developers, everyone is trying to create a software that will make them millions and also save a lot of working hours for business entities. Some tech firms have already launched their finished products while some are still working on beta versions or offering preview versions. Whatever your preference, if you are businessman, you need to make that update in your office computers before the clock hits 12 on Friday.
With a new system comes mandatory training of the manpower. From data entry operators to book-keepers, everyone from top to bottom needs to be trained in the manner in which business under the GST is to be carried out. Training will be different at different levels. While senior management need to be trained on strategic aspects, accounting and tax team need to be trained on key changes impacting the compliance framework.
Prices of almost all products will now have to be as per the new GST rates. Prices will change, some will come down and some will go up. While the transparency that the unified taxation will bring is definitely going to be a plus in the long-term since even the consumer will know the tax he is paying on a product, the current sentiment is one of confusion. Though the government has released the list of rates that will apply to a wide variety of items, the actual impact on prices is yet to be seen. As an immediate fallout, businesses may see a rough quarter or two as the pricing mechanism gets clearer. Another sticking point in the short-term will be the provision to mandatorily pass on the benefits of lower tax rate to customers. While the government has passed on directives to businesses to this effect, there has been little clarity on how the difference is to be tabulated and the benefit passed on to the consumer.
Input Tax Credit
Input tax credit, a major change that the GST brings with it, means that at the time of paying tax on output, manufacturer (or trader) can reduce the tax that has already been paid on inputs. This is similar to VAT input credit. To claim the ITC, you must have a tax invoice of purchase or debit note issued by registered dealer, which means you cannot have off the book dealings anymore and all your transactions must be invoiced. This will change a lot on part of businesses as they will have to operate in more transparent manner. The gain from the ITC has to be mandatorily passed on to consumers, failing which they face action under the anti-profiteering provision under the GST, even de-registration. However, businesses are nervous because they do not know how profiteering will be tabulated and how the authority set up in this regard will act.
GST compliance is currently the biggest worry for businesses. Besides lack of information, loads of documents are needed under the new tax regime. From migration and registration to Input Tax Credit, businesses will need documentation for almost everything. But most of the documents will be in digital form, which will make the process easier. The transition towards compliance to the new GST laws will bring some disruptions as there will be no legal precedence and little experience under the new law. The appeals and the verdicts will set new precedence for future compliance-related litigations.
One of the top gains of Goods and Services Tax (GST) is that the new taxation system will bring much-required transparency to businesses in India. From government entities to private firms, India has been plagued due to the complex web of taxation followed in India. Businesses are kept in dark by authorities about policy, the corporate keep their clients in dark, consumers know little about the products. If you ask a consumer about how much tax he has paid on a particular product, there is a very good chance that you will get an answer --“I don’t know.” The GST could bring an end to all this. From buying raw material to paying taxes, businesses will have to be transparent under the GST. It is hard to say that tax evasion can be eradicated but the new system will minimize the chance. The GST is a digital system which will make it is easier for the authorities to track every transaction and make it harder for tax evaders to destroy records.
Ease of doing business
License raj, permit raj, red-tapism and inspector raj - these are terms often attributed to India’s bureaucracy that became a hurdle to an industrial revolution in the country. In early 1990s, then Prime Minister PV Narsimha Rao and his Finance Minister Manmohan Singh, with much-needed reforms, changed the way India conducted business. Despite the large-scale reforms that boomed the service sector in the country, India failed to keep up with time in the last 26 years and is still behind 129 countries in the World Bank’s Ease of Doing Business Index. With the introduction of GST, New Delhi’s aim to break into top 50 economies seems plausible. The GST limits authorities’ intervention in the conduct of business. Registration has been made easier and simpler. Migration, compliance, tax filing, tax credit claim, all will require minimum interaction with officials which in turn would bring down corruption substantially. Existing state-wise laws and tax codes only made it harder for businesses to operate across state lines. Once removed, businesses will operate without hurdles. GST’s main purpose is to turn the country into a single market, making it easier for firms to function in a simplified system.