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Arguably the biggest indirect tax transformation will be upon us in a few weeks from now. The law makers are deliberating on the specific clauses and contours of it – so that the appropriate legislations can be passed. There is no doubt that this will be one of the great levelers in the market, and open out the Indian market for the businessman. The barriers of inter-state trade will disappear, and one will be able to find more customers and more suppliers than the present. Less people will be able to take undue advantage of law provisions, or by evasion of taxes, and so more businesses will flourish since competition will have a level playing field. Absorbing multiple current taxes into a single tax regime will reduce time and cost of compliance. It is indeed time for celebration. Except for the Small Businessman. CLICK TO TWEET In general, Small Businesses are generally ‘more honest’, and generally suffering ‘more cash flow problems’. Whether the increased relative honesty comes due to fear of social stigma, or inability to ‘settle’ when problems are detected, or the benefit of dishonesty is not large enough to be a temptation, or just the basic moral fibre not being tested with enough temptation, is actually a moot point. It is well known that the Micro Lending space sees the highest repayment ratios of any other lending business. At the same time, the Small Business suffers frequent unevenness of cash flow. Even a simple one-week delay in receiving money for goods sold throws their routine out of gear. A marriage in the family? The cycles take several weeks to repair. A promising auction or offer for materials which would give them higher profitability, and they have to readjust their cash cycles for a few weeks to take advantage of it. A marriage in an employee’s family? Their desire to help out comes at a cost of their cash flow management. The current statement by the Government in their Draft Model Law for GST has a few proposals which will slowly, but with certainty, drive almost every Small Business to eventual closure. This is not the INTENT of the Government, it is simply an unexpected consequence of other good intent. It is also CORRECTIBLE, provided the causes, and the consequences, are appreciated. The provision for ‘input tax credit available to buyer only if supplier has paid tax inside a given window’ is one problem which a reasonable percentage of Small Business will face in their life-cycle. Most (if not all), will have no bad ‘intent’ of evasion or not paying. Nor will they be taking the Govt. for granted. It is just that they may sometimes need to delay payment, due to other exigencies – some of which I described above. Sometimes, the choice of ‘paying salary to my workers on time’ and ‘paying a penalty to the Govt. for delayed payment’ is a conscious call they take, otherwise they may lose their people. Sometimes, the pressure of paying their supplier becomes critical, else their material cycle is broken and they may permanently lose business of their customers – so again the ‘penalty for delayed payment’ becomes acceptable. And, they eventually pay. A related and even more frightening provision is that the Government intends to make public a ‘Compliance Rating’ – so you will know before you buy whether your supplier has a ‘good or poor’ rating. The objective being, that since your input tax credit is dependent on this ‘quality’ of the supplier, you will try to avoid buying from people with ‘poor’ rating – which means, that people will do everything they can to AVOID a poor rating. And the rating becomes ‘poor’ not just because you delay filing your data, but because you may have delays in your payment. In essence, when you take these provisions together, any difficulty a Small Business may have faced, will now have ‘visible and public’ knowledge and corresponding snowball impact. So, the moment you face a problem, the problem magnifies the next month since your buyers will ‘play it safe’ and buy from others (the fact that the market is now a ‘more open market’ is a boon here). This will simply increase your problem, leading to further payment delays and/or further reduction of your rating, losing even more customers – till you eventually face closure. The need of ‘emergency funds at any cost to pay GST and avoid bad rating’ for Small Business is going to lead to usurious scenarios, and cost burdens which they will be unable to sustainably bear. As it is, they are unable to manage costs through economies of scale. Now, just trying to keep their ‘business afloat’ in a GST regime, will become prohibitive. And the paradox is, GST was expected to REDUCE compliance costs! CLICK TO TWEET There is no doubt at all that the Government has every right to deny input credit for possibly fraudulent claims on false bills. With the current provisions of suppliers needing to register their supplies with GSTN, and input credit only being available on such invoices, this is already a plugged problem. By demanding that all businesses must have uploaded their invoices fully establishes their liability, and their payment (or the right of the Government to demand/collect the payment) is almost certain. It is rumored that the key reason for such an unsustainable provision in law is due to the problem of IGST distribution to various states, particularly when a given business fails to pay. Alternate methods to deal with this are all under consideration by the Government, but the present Draft Law continues to reflect the provisions above – but the unofficial sentiment is that this problem can be solved later, and the first implementation happen along the present Draft Law framework. Yet, this is not a problem to solve later. There is no such thing as temporary death. Enough small businesses will be wrongly ‘branded’ as ‘why take risk in dealing with them’, and they will not be able to recover even if law changes later. The reverse is true. If the Government does not find tax fraud dramatically going down even WITHOUT this provision, they can always introduce it later as ‘the only way to control’. The change being requested is – do not link ‘payment’ to statement of ‘valid return’. Let a ‘valid return’ be one which is correct in its computation, and defines the liability of the tax payer. Let a ‘valid return’ of a supplier be the only basis on which a customer can claim ‘input credit’ (this is already the current provision of law, except that it is treated as ‘valid’ only if the liability is ‘paid for’). This simple change will anyway unlock the businesses, improve compliance, and dramatically reduce fraud due to the triangulated nature of GST. Linking payments to tax credit is not just a ‘flaw’, but a major ‘anomaly’. CLICK TO TWEET Taking a simple chain of 3 businesses, assume Company A raises an invoice of 1 Cr + 20 Lacs GST (total value 1.2 Cr) on Company B. Company A also discharges the tax of 20 Lacs to the Government. Company B now raises an invoice of 1.2 cr + 24 lacs GST (total value 1.44 cr) on Company C. Company B is liable to pay 24 lacs, and take credit of 20 lacs, and therefore, needs to pay 4 lacs to the Government. However, due to some situations, it fails to pay it. Company C now raises an invoice of 1.5 cr + 30 lacs GST (total value 1.8 cr) – and assume this is end of the chain (that is, sold to an end consumer). Company C was liable to pay 30 lacs after taking input credit of 24 lacs – or net of 6 lacs. However, due to Company B’s inability to pay the tax on time, this input tax credit is denied, and Company C has to pay the full 30 lacs. Now, IF Company B had paid the tax, the total tax collected by the Government would have been 20 by Company A, 4 by Company B, and 6 by Company C – or a total of 30 lacs. However, since Company B failed to pay in time, the Government actually collected 50 Lacs! 20 by Company A, and 30 by Company C. Suddenly, non-payment of Tax by Company B has become a bonus to the Revenue Department! Also, it is entirely possible, that Company B either voluntary, or through recovery action initiated by the Government, lands up paying a part of the 4 lacs. Making the total collections become even more than 50 lacs! This anomaly of law will be inherently unsustainable. Suddenly, non-payment of tax by Company B will be seen (albeit wrongly) as something good for the nation, since the revenue of the country will go up! Suddenly, non-payment of tax by Companies will be seen (albeit wrongly) as something good for the nation, since the revenue of the country will go up! CLICK TO TWEET That is certainly neither the intent of the law, nor can it be upheld as a valid outcome. It is VERY IMPORTANT that all of us, as citizens, help the Government to formulate a law which will give the benefits that it has the capability of, rather than create the problems which are not required to be created. The present laws are already giving tremendous security and protection against tax evasion, and only some minor technicalities require to be resolved (for IGST, for example) – and this artificial and unsustainable provisions can be replaced with the simpler ‘input tax credit available only on invoices registered with GSTN’. In fact, the current laws also allow for ‘provisional input credit even if the invoice is currently not registered’, and businesses will be more than happy to give up this ‘luxury’, if the ‘payment linkage’ is removed. Let us all pray for a Great GST Law which we will welcome with open arms, and not one which we will struggle under.
March 2, 2017 • No Comments Why is Technology the Epicentre of GST Implementation Share 262 Tweet Share 12 +1 2 SHARES 276 Technology-assisted compliance is not an entirely new concept in India. Way back in the 1990s, taxation departments used technology for tax administration. However, this was mainly as a backend mechanism. A major shift in behaviour occurred when online filing of returns was introduced. This was largely a result of different computer systems being integrated, thus enabling taxpayers to directly interact with the tax department. Under the current taxation system, data or information broadly flows in one direction to the Government, which we can describe as a B to G or Business to Government data flow. With the use of technology, the time and cost has reduced significantly while accuracy of compliance has been greatly enhanced. Technology for GST compliance – what is different this time? With technology already a driving force for compliance today, what then is the need to revisit issues that concern the right technology for GST implementation and compliance? Why will technology play a pivotal role in GST implementation and administration from both a government and business perspective? With GST, the two major goals that the government intends to achieve are: • Reduce tax evasion • Simplify compliance for taxpayers In the prevailing tax systems, there are several cases where the government has not been able to detect evasion and loss of tax revenues. As a result, it has become a challenge for the department concerned to track the input claims against the liability of the seller. There have also been numerous cases of duplication of claims on input tax, fraudulent claims, input tax claims that do not correspond with tax liability declared by the seller, or seller who has not furnished his tax liability. In order to overcome this, GST has introduced invoice matching of buyer and seller. It has been estimated that the taxpayer base under GST is around 8 million. With billions of invoices to be matched on a monthly basis, there is a critical need for a real time invoice matching capability, supported by robust IT infrastructure. There is no way invoice matching at this scale can be achieved manually. What is GSTN’s role in simplifying compliance for taxpayers? The GSTN is currently working on rolling out state-of-the art IT infrastructure that will introduce changes that are significantly different from the current system. Equipped with an open API (Application Program Interface), the GSTN server will seamlessly connect with third party applications used by taxpayers, thus providing an all-user interface, and convenience via desktops, mobiles, and tablets. This will assist taxpayers to automate their invoice matching from within their software rather than by logging onto the portal. This will save time, and drive simplicity of compliance procedures. GST will drive a lot of discipline in filing returns at regular intervals, and automation will help businesses achieve this with less pain. Use of technology will also enable efficient tax administration for registration, returns filing, data exchange, and effective investigation, monitoring, auditing and performance analysis with little or no human intervention. It will also provide several user-friendly features such as offline capabilities, alerting capabilities, mobile/tablet interface, and additional mechanisms to avoid duplicity of data. As this tax system is being implemented for the first time in India, businesses will encounter several challenges during the initial stages of implementation. However, once systems are streamlined, the two important objectives envisaged – curbing tax evasion, and increasing tax revenue and ease of compliance for taxpayers will be achieved. The success of this transformation will help our nation create history in the world of GST compliance. So what should businesses do now? The GST regime which begins on July 1, 2017, will ride on the strength of technology with seamless interface with the GSTN server. Businesses must automate their manual systems, and install software that is robust enough to interact with the GSTN system, and assist in immediate, accurate, and reliable compliance. Invoice matching is a very critical requirement of GST. Because of the clear timelines dictated by GST, compliance will no longer be a month-end or quarter-end activity. Therefore, invoice matching and other compliance related activities cannot be achieved using a manual or a low-tech system. Speed and accuracy are both critical. Businesses will have to start interacting frequently with the GSTN system. This will require a GSTN-enabled business application or accounting software so that the task ahead become seamless and efficient.
GST Network extends deadline till April 30 2017, for existing firms to register MUMBAI: with only 54 lakh businesses, out of the estimated 80 lakh, enrolling with the GST Network (GSTN), the infrastructure provider has decided to extend the deadline to register with it till April 30 from March 31. There are about 65 lakh registered value-added tax (VAT) assessees, 26 lakh service tax assessees and another five lakh central excise assessees, who are expected to register under the unified GSTN, which provides IT infrastructure and services for implementation of GST. It’s a private limited company with the central and state governments holding 49 per cent stake, while the remaining 51 per cent is with non-government financial institutions. “The voluntary enrollment process started six months ago and 73 per cent of the businesses have registered. We will be extending time till April 30, for the others to enroll, ” Prakash Kumar, CEO, Goods and Services Tax Network told Express. He added that starting April, the central and respective state government tax departments will kick-start training campaigns to familiarise assesses on filing returns, which starts from August. However, small and medium enterprises, the backbone of the country’s industrial activity, await clarity on key aspects such as input tax credit. According to GST laws, input credit against taxes paid by the purchaser can be availed only if the seller deposits the said tax with the government treasury. In the event of non-compliance, the purchaser will be denied input credit. “There’s a need to de-link payment with the availability of input credit, which GST is capable of providing as it brings transparency and protection against tax evasion, ” said Tejas Goenka, executive director, Tally Solutions. Meanwhile, small and medium businesses also want relaxation of audit considering the shortage of chartered accountants. “There are only 2.3 lakh CAs in the country, of which 40 per cent are not practicing and those who are serving cannot cope up with the increased demand. We requested the government to exempt MSMEs up to Rs 5 crore revenue for audit and also allow cost accountants, tax consultants and income tax assessors to audit financials for ease of use, ” said Avinash K Dalal, national president and founder, All India MSME Association. Source:
The Goods and Services Tax (GST) is India's biggest indirect tax reform since independence. The GST bill, proposed to be implemented on July 2017, will simplify the tax framework for businesses It is important therefore, that you are prepared for this significant transition! GST is going to impact your cash flow, profitability and tax compliance. Input Tax Credit Now you can claim Input Tax Credit on all taxes paid on your business expenses Tax Return Filing If you do not file your return and pay the tax, your customer will not be eligible to avail Input Tax Credit . Also, if you miss a monthly filing, you will not be allowed to file for next month unless you have cleared previous month filing. Compliant Vendors Vendors need to be chosen carefully, as their credibility and compliance will impact your business. Similarly, your buyer will start choosing his vendors (you and your peers) based on your discipline and compliance. To ensure that business is able to transition to GST, you need to ensure that : Tax returns matches books of accounts during filing Maintain invoice level details to track and claim Input Tax Credit Meet tax filing timelines on 10 th, 15th and 20th of every month Your first step towards being GST ready
Understanding Mixed and Composite Supply in GST. If you look at the market today, you will notice very often, two or more goods, or a combination of goods and services, are supplied together. This could be due to either of the following reasons: A sales strategy – to attract more customers The nature or type of goods or services, which requires them to be bundled or supplied together Under Service Tax, this mechanism is called Bundled Service – which is the rendering of a service or services with another element of service of services. Under the revised model draft GST law, supplies which are bundled with two or more supplies of goods or services or combination of goods and services are classified, with distinct characteristics, as: Mixed Supply Composite Supply Mixed supply The supply of two or more individual supplies of goods or services, or any combination of goods and services, by a taxable person, for a single price, is called Mixed Supply. In Mixed Supply, the combination of goods and/or services are not bundled due to natural necessities, and they can be supplied individually in the ordinary course of business. Determining mixed supply Let us understand this with an example. Consider a kit which contains a tie, a watch, a wallet, and a pen, as a combo, for Rs. 4, 500 GST Mixed Supply As per the example, Tie, watch, wallet, and pen are bundled as a kit The supply of a tie does not naturally necessitate the supply of other elements (watch, wallet, pen) and vice versa. The kit is supplied for a single price. Hence, the supply of this kit is a mixed supply. Tax liability on mixed supply To calculate the tax liability on mixed supply, the tax rate applicable on the goods or services attracting the highest rate of tax, in the combination of goods and services, will be considered. Let us consider the example of the kit again. Product Rate of Tax* Tie 12% Watch 18% Wallet 12% Pen 5% *Indicative rates In this case, the watch attracts the highest rate of tax in the mixed supply i.e., 18%. Hence, the mixed supply will be taxed at 18%. Composite supply Composite Supply of goods and services is made by a taxable person to a recipient, and: It comprises two or more supplies of goods or services, or A combination of goods and services, which are naturally bundled and supplied, in the ordinary course of business. This means that the goods and services are bundled owing to natural necessities. The elements in a composite supply of goods and services are dependent elements on the ‘principal supply’ of goods or services. What is principal supply? The pre-dominant element in the supply of goods or services, forming part of composite supply, is principal supply, and any other dependent supply, forming part of composite supplies, are secondary to principal supply. Determination of Composite Supply Let us understand this with an example, A 5-star hotel in Mumbai provides a 4 days/3 nights package, with breakfast.GST Composite supply This is a composite supply as the package of accommodation facilities and breakfast is natural combination in the ordinary course of business for a hotel. In this case, the hotel accommodation is the principal supply, and breakfast is ancillary to the hotel accommodation. 2. A 5-star hotel in Mumbai provides a 4 day/3 nights package with the breakfast and one day Mumbai Darshan. The inclusion of Mumbai Darshan in this package is not a natural requisite to accommodation in the hotel. Hence, this does not amount to composite supply. This is a mixed supply. 3. Sale of laptop with bag -this is a composite supply because laptop bag is natural requisite to carry the laptop. But if the customers opts for a multipurpose bag like backpack bag, it is not a composite supply since it is not naturally bundled. Tax liability of composite supply For purpose of calculating tax liability, the rate of tax applicable on the principal supply of such goods and services will be effected on the composite supply. Let us consider the same example, A 5-star hotel in Mumbai provides a 4 days/3 nights package with the breakfast. Let us assume, the hotel accommodation attracts 18% tax and the restaurant service attracts 12% tax. As per the example, hotel accommodation is the principal supply, and the entire supply will be taxed at 18%. It is important for businesses to look at the types of supplies made by them and re-assess them in order to achieve the objectives of bundling the goods and services, in context with the concepts of mixed supply and composite supply.