Passage of the Goods and Services Tax (GST) has been one of the most important tax reforms of modern India. Ever since its introduction on July 1, 2017, the issue of compliance has been in the limelight, as GST’s success depends on timely compliance.
GST calls for digital transformation. Hence, technology, specifically tax automation, has been a key factor to meet compliance requirements. The main advantage of a technology-driven system is that it is easier to detect the anomaly earlier.
GST requires a host of compliances — from passing accounting entries, to GST computation, to return filing. Apart from invoice matching, businesses need to ensure that not only do they file their own returns and pay their own taxes on time, but that any other firms with which they do business do so as well. If other firms fail to file or make payments on time, payments such as input tax credits will not be available to the businesses, and both firms could incur substantial financial losses.
Numerous extensions were filed in 2018 due to painstaking procedures and issues with online utilities. Many of the requirements for filing returns were not clear, which also led to confusion for businesses.
The new return filing system
The GST Council has approved sweeping changes to the tax return filing system, with a simplified returns format expected to be rolled out in April 2019. This may be delayed, however, due to general elections as well as extensive testing procedures to ensure the system performs as expected.
The draft plan of the new return filing system calls for first releasing a prototype of the software, which will be connected to a small server, followed by the release of a beta version. This beta version will be available to certain industry bodies and tax practitioners who can test the software in real world applications and look for any bugs. Many people felt that a major downfall of the previous return filing system was that it had only been tested in-house, never in an actual working environment. The GST Network (GSTN), the return filing system and IT backbone of the gigantic tax reform, was required to process as many as 3.5 billion invoices each month. Although the GST Council knew there would be a large number of transactions, the server was still not prepared to take such an overwhelming number of returns. As a result, the load and the system collapsed several times.
With new leadership in the GSTN authority, businesses throughout India are anticipating an improved IT infrastructure in 2019 that will allow for more efficient GST compliance.
Under the new system, it is likely that taxpayers with an annual turnover of more than INR 5 crore will need to file only one monthly return. Those with an annual turnover of less than INR 5 crore can opt for quarterly filing in either regular quarterly returns or the GSTR Sugam or GSTR Sahaj return.
Furthermore, the new system will require HSN details, which were not mandated until now. With this information, the government will be in a better position to analyze data and pinpoint industries where they have a very huge supply input but are not proportionately showing production output.
GST had been perceived as a remedy for tax evasion. However, since invoice matching was put on hold, this purpose has not been realized so far. To date, return filing in GST has been confined to summary returns (GSTR 3B) and details of outward supply (GSTR 1).
The new return filing system as envisaged is simple, with two main tables: one for reporting outward supplies, and one for availing input tax credit based on invoices uploaded by the supplier. Invoices can be uploaded by the seller at any time during the month. These invoices can be viewed and locked by the buyer in order to avail the input tax credit. Once the invoice is locked by the buyer, it will become the confirmed liability of the seller. This mechanism will ensure that a large part of the return is automatically filled in with information from the invoices previously uploaded by the buyer and seller, thereby making the entire process less cumbersome. Once invoice matching is established in the coming year with the new GST system, tax evasion can perhaps be taken care of.
Businesses will need to adopt robust technology solutions to meet their end-to-end GST requirements. The process-oriented system of GST requires businesses place an emphasis on updating their accounting systems, as proper recording of transactions and uploading invoices on time and accurately will be key to compliance under GST. Because specialized software will be required, adopting new accounting technology or upgrading accounting systems might become a costly issue, depending on the size of the business. Businesses will need to invest in software that facilitates direct integration of data, as seamless integration with GSTN for information upload and download will be imperative. Currently, the emphasis is more on application service providers, ERPs, or accounting software that can take this challenge head on and make the process smoother. GST has opened avenues for companies that provide accounting solutions, and we are likely to see more such companies competing in 2019.
Change in refund filing
The government has announced that it has cleared GST refunds amounting to INR 0.91 trillion, which is almost 94% of the total refunds claimed. With the new GST refund filing system being introduced on a pilot basis in April 1, 2019, officials insist that new IT infrastructure will be superior and the refund processing will be even faster.
Compliance rating system
In 2019 we can expect the compliance rating system to finally kick in. A good GST rating is something every business will endeavour to achieve, as it will enable businesses to take advantage of various benefits including faster refunds and less scrutiny. We can anticipate that the technological setup for ratings will finally be in place in 2019.
Objectives to be achieved in 2019
The main objective for the introduction of GST was to reduce tax evasion and simplify tax compliance, with Information Technology being the mainstay of GST. GST, so far, has been a failure on both the counts. Just like the quote, “a little knowledge is a dangerous thing,” similarly, semi complete technological compliance creates conflict of interest and increases mistrust. With the extensive changes taking place in IT, we can hope that 2019 will provide us with better GST system.
Going forward, it will be essential for businesses to explore the use of technology to ensure timely and effective compliances. Presently, many companies are providing cloud-based GST compliance software. Businesses should recognize their needs and accordingly select a software that is best suitable for them.
GST is a single tax on the supply of goods and services, which will make India a unified common market. GST will replace all current indirect taxes with a multi-point consumption tax.
The introduction of a GST is certainly going to have a huge impact on the nation as a whole, which will include small and medium businesses (SMBs) and startups, as well as big enterprises. All these will, in turn, create an additional market for IT and ERP providers.
Impact on small & medium enterprises
A larger portion of small and medium enterprises will be covered by GST, as the exemption limit proposed has been fixed at Rs 20 lakhs for all India, except for northeastern states, where the threshold limit has been fixed even lower, at Rs 10 lakhs.
There is relief, however, for the SME sector in that jurisdiction. Businesses with a turnover of Rs. 1.5 crore and below would solely be assessed by the states, while for those above, it would be jointly assessed with the central and state governments.
How SMEs will be effected by GST
- Wider base of SMEs: In the excise arena, the minimum exemption limit was Rs.1.5 crores for the manufacturers, which has been substantially reduced to Rs. 20 lakhs to cover a major portion of SMEs in the GST bracket.
- Increase in customer base: Currently, SMEs restrict their trade to local purchases and sales, as they have to bear the tax burden on interstate sales for which they cannot avail the input set-off, thereby increasing their cost of production. This will no longer be the case under the new GST. Also, in the new GST regime, tax credits will be transferred irrespective of buyers’ and sellers’ location, which will allow the SMEs to expand beyond their local tax district.
- Dual tax rate: GST will operate as a dual tax rate (CGST & SGST) for local supplies, which will increase the intricacies of maintaining books of accounts and lead to additional audits from tax authorities.
India for startups in GST regime:
Before GST, new businesses had to contend with tax bureaucracy earlier, which restricted the ease of doing business. The GST regime is likely to be friendlier for startups, due to the following measures:
- Single-point registration: Currently, new enterprises must register with VAT Authorities, Service Tax Authorities, and other local bodies, which increase the burden of tax compliance for startups. As a single-point registration tax, GST will eliminate multiple points of registration. The GST registration procedure will be standardized, making it easier to start a business in India.
- Integration of multiple taxes: GST will simplify the current taxation scheme, as only one tax (GST) will prevail for all indirect taxes. This will directly lead to lower and standard tax compliances resulting in simplifying the Tax procedures.
- No separate distinction in sales & service: GST is calculated on total value: there is no distinction between sales and services, eliminating complex WCT calculations necessary under the old regime.
- Input tax credit: Upon registration for the GST, new startups will immediately be eligible for input tax credits on all purchases, both in-state and out-of-state. This will lead to expansion of cross border business and reducing the cascading effect of tax. Full credit on capital goods is claimed in one installment under the GST regime, which will have a direct impact on the cash flow of new companies, as full input credits will be available to discharge GST payments.
New IT systems to address challenges: GSTN at Macro Level
The GST system depends on online matching of supplier GST liabilities to buyers’ input GST credit claims.
In order to have a seamless system of matching credits, GSTN will provide an online generation mechanism for supplier tax invoices, which will:
- Eliminate the need for data entry by buyers. This will leave no need for reconciliation/matching of the output GST database with the input credit claims database.
- Relieve the purchaser from the burden of entering supplier bill data, as well as from following up with suppliers for unmatched credits.
- Make documentation easy and automatic by using uniform software.
- Lead to accuracy with a smaller staff and less effort.
ERP updation for big enterprises
Upgrading Enterprise Resource Planning (ERP) software will be one of the main ways corporations adapt to GST. ERP plays a major role in managing & monitoring the transactions for an origination which includes all the support models for business functions and integrate them in one package.
Migrations are obvious to happen due to the complexities that will come along with GST. Every business’s ERP must have strong features and easy adaptability, which will help companies migrate from the present regime to the GST regime.
Possible reasons for required updates to ERPs will be:
- Change in master data with respect to registration details of vendors, customers as all of them will be required to obtain GSTIN.
- Legal compliance with respect to return filing will undergo a huge change due to new return formats under GST.
- Matching of ledgers will be another complicated job, requiring up-to-date transactional data.
- MIS reporting will undergo a substantial change, as information required will be on real-time basis, requiring on accurate and complete information.
To summarize, GST is bringing along major changes for Indian businesses. Beneath all the excitement is the fear of unknown, which needs to be resolved by indirect tax automation providers who understand and handle GST globally and can handle the impact of changing taxes.