Why GST Requires Serious Planning?

With GST deadline just a few weeks away, significant structural changes are being scripted for India’s tax structure. Underestimating the gravity of such changes and taking GST just as another tax or a tax rate change can backfire in your business in a big way. The implementation of GST will require some serious homework, considering the paradigm shift in the way returns and tax computation will be affected. There are scores of articles available on the internet which detail the impact of GST, the intent of this article is not to duplicate the excellent knowledge that many such articles contain, but to raise a red flag for those who have yet to take this seriously.

A great starting point, especially for SMEs who may not have Chartered Accountants on their rolls, is to get in touch with their CA firms and seek an information sharing session on how various aspects of GST will impact their business.

Business owners need to very actively analyze how GST will impact their operations, especially those relating to sales and procurement as well as all tax reporting. One of the big changes is the way input tax credit will be claimed under GST. The spectrum of input tax credit has been widened and now covers any input or service, including business overheads, which wasn’t the case earlier. This is highly likely to have an impact on the working capital of enterprises. Whether it will be for the good or bad, will depend on the preparedness of enterprises as far as their GST compliance is concerned.

Companies can now claim the input tax credit once the taxes are paid by their suppliers in stipulated time-frame. GST compliance requires companies to file GSTR-1 and GSTR-2 for their outward (sales) and inward (purchases) supplies respectively. This makes the reconciliation of invoices all the more important. All invoices for various business transactions now come under the registered GST Network. This leaves no scope for any discrepancies in transactions, as an inaccurate claim for Input Tax Credit can be picked up by the system in no time.

These structural changes are a call for enterprises to take decisive strides toward automation and get rid of their over-reliance on the manual processes. Companies dealing with a large number of invoices every month need to automate and upgrade their accounting systems to cope with the increased frequency of returns filed. A robust e-filing software in place can facilitate an interface to make the process of reconciliation under the GST regime more seamless. Moreover, the compliances under the GST regime are required to be filed/reconciled in a much shorter time period as opposed to the existing time periods for Service Tax, Excise, CST, etc. It won’t be a cakewalk for manufacturers to comply with the multi-state and destination based tax regulations under GST, and there will be serious management issues if they still haven’t automated their processes.

Another interesting addition under the new indirect tax regime is the Compliance Rating which will be a crucial parameter for companies to select their vendors. The compliance rating will be given to businesses according to their consistency in filing returns and paying taxes. Companies can take a note of this rating before indulging in any kind of business with the other party, to zero-in on a vendor who is GST compliant. To cut the long story short, companies cannot afford to take GST compliance lightly as their Compliance Rating will continue to plummet in doing so, thus inflicting significant losses.

In conclusion, perceiving GST as a mere change in the tax rate will be a mistake. GST calls for a behavioral change among enterprises so that they can put their heads together and assess its impact on their businesses. Being proactive is the way forward to reap the potential gains of GST compliance.

About the Author

Mr. Sanjay Agarwala is the Co-Founder and Managing Director of Eastern Software Solutions Pvt. Ltd. Among other things, he is considered an authority on “Doing Business in Africa” and has spoken extensively on the subject at various industry seminars over the years. He is on the Executive Committee of India’s Software Export Promotion Council. Prior to founding ESS, he worked in technology as well other industry domains. He is an alumnus of the Indian Institute of Management, Ahmedabad. In his leisure time, Mr. Agarwala loves reading and is also an avid gardener.