Implementation of GST is a significant tax reform in the fiscal history of India. Goods and Services Tax (GST) rollout on 1st July 2017 will mark the beginning of a new tax regime leading to remarkable transformation and greater transparency. But the noble mission of ‘one nation, one tax’ comes with of challenges, at least during the transition phase. Countries like Australia, Malaysia, Singapore and South Korea have met with numerous challenges in the process of overhauling their indirect tax system. With 80 lakh tax paying businesses, India is about to experience a nationwide chaos July onwards.
Let’s look at the key issues afflicting the industry-
Migration Challenges to GST
The initial migration process was focused on getting existing assesses which are registered under VAT, CENVAT, Excise, etc – primarily any goods manufacturer – to get enrolled under GST. GSTN’s focus on getting service tax assesses migrated to GST was a second phase of the exercise. So for service tax assesses, there is still a lot of work pending.
Multiple registrations are perceived as a pain factor for service sector companies (BFSI, Telecom, Media, etc.) having a national footprint, because of increased overhead of compliance. Earlier, they were working under one reporting system and now they need to report their taxes separately for every state.
For a goods manufacturing company, the transition is not much of a shock. In fact for some manufacturing companies registered under VAT, GST is a welcome change.
Many are not aware of the workflow and timelines they have to adhere to. Although a large number of awareness campaigns are being conducted by various stakeholders, the awareness around rules and compliance process, to be followed every month, has still not reached grassroots.
Supply Chains for most of the Corporates are not yet ready for GST adoption, especially SME Suppliers and Dealers. Many have just completed registration process, but are not aware of the compliance requirements (like return filing frequency, data to be reported etc)
Majority of taxpaying businesses are not geared up to the invoice reconciliation issues that they would be exposed to once GST rolls out. For a Buyer to get Input Tax Credit, they have to ensure that their purchase invoice matches with the Supplier invoice on GSTN. Not just that, the Supplier has to file a valid return, which covers the Buyer’s purchase invoices. If the Supplier has not paid the tax, the Buyer doesn’t get input tax credit, he was claiming through the process. Even if the reconciliation has been done, the responsibility doesn’t end there. Effectively, the government is completely putting the onus of tax compliance on the entire Supply Chain.
Input Tax Credit to a Buyer will only be paid on reconciliation of invoice, return filing and payment of tax by the Supplier. Effectively, the Buyer’s ITC remains locked if the Supplier has not paid tax or paid incomplete tax in the same month as the Buyer. In such a scenario, Buyers need to exert pressure on their Supply Chain as a peer for accuracy and tax compliance.
Very few are taking a proactive approach to enable Supply Chain’s readiness by setting up helpdesks for facilitating their Suppliers and Dealers, educating about migration that their Supply Chain needs to do for getting GST ready.
Others are taking stricter stances of blacklisting such Suppliers or making short payments to them, knowing their ITC realization would get delayed. In effect, there will be an increase in average realization period of invoices, cash flow implications and working capital crunch hitting Supply Chain especially tier 2 and tier 3 where awareness of GST rules is scant.
Some steps of GST Act is putting a lot of compliance overhead on the taxpayer and some steps are overkill. For e.g. requirement of eWay Bill creation by the seller for each invoice of any goods more than INR 50,000 being transported from one place to another and that eWay Bill getting accepted by the Buyer and the transporter implies a lot of additional overhead. A large number of states like Maharashtra do not even have the concept of eWay Bill. Adaptation of a new concept in this process again is going to be an overkill.
There would be a lot of pressure on the Chartered Accountant community to manage their clients’ processes in a timely manner. They have to beef up their team by hiring more resources to manage large volumes of filing processes in a limited time.
Inadequate effort on GST ecosystem awareness
While GSTN continues to be busy in terms of building up their core infrastructure up, there is a lack of education and awareness in the industry. Essentially the service providers are left to carry out discussions for the industry to come up the curve and understand. This gives rise to a lot of doubt and misconceptions.
Modes for transmitting data to GSTN for return filing are still unknown. There is lack of clarity on the roles of ASP and GSP. While many large companies still do not have their Service Providers in place, others are contemplating on whether they really need an ASP or a GSP.
A more proactive approach by GSTN is required to educate the taxpayers. With the limited timeframe, if there was a central awareness program by GSTN, it would have helped build the momentum and give a direction to the taxpayers on how they need to move forward.
Inability to comprehend pricing
The industry is not used to the pricing paradigm that is expected in GST ecosystem. In the old world, essentially companies had the concept of filing returns through a central G2B portal or at the best hire a professional to do the same. Here, they have to pay the Service Provider an amount which is linked to the volume of transactions, either on a number of invoices for ASP or API calls for GSP, which is a new concept. Taxpayers believe that this is going to significantly increase their compliance cost.
The entire GST compliance process will be technology driven. One can’t manage reporting and reconciliation of thousands of invoices without technology. However, the industry at large is underprepared for the migration.
GSTN, GSP and ASP readiness with ISO audit certification, MPLS setup, application development, evolving APIs, lack of standardised technical documentation for developers poses a problem to market their solutions since a majority do not have a ready solution to demonstrate.
Taxpayers are forced to select their solutions based on some informed judgments. Selection of ASP and GSP is still underway for over 80-90% of the Corporates. Sections of the industry are still contemplating on using the G2B portal of GSTN for compliance. Streamlining of tech solutions, integration of ASP with reporting systems like ERP, accounting software requires months to be implemented.
Moreover, the industry will be confronting substantial amount of manual work in this new tax regime.
To conclude, the challenges India is about to face are no different from what other countries have gone through while implementing GST as a major tax reform. Once implemented, GST is likely to eliminate the cascading effect and help in curbing tax evasion. Despite the various roadblocks on the way, India is on the way to witness the biggest ever tax reform since independence.