Three Years that Changed How India does Trade
Since the beginning of the GST regime in 2017, there has been a dramatic shift in how India Inc. does business. Specifically, the small and medium enterprises (SMEs) have gained a lot from GST. To put simply, as opposed to 17 levies such as excise, VAT, service tax, and various other cesses, SMEs now have to comply with a single tax. The relief from GST does not restrict to passing the bill in 2017. Since then, there has been ongoing work in this area to give relief to SMEs. Let us look at how GST, which is considered the most significant tax reform since Indian independence, has transformed the Indian business landscape over the past three years.
Provided a Major Tax Relief: Since the advent of GST, there has been a significant drop in effective tax rates. Reducing tax rates on numerous items has reduced the effective tax rate to 11.6% instead of 14.4% in the pre-GST era. Moreover, input tax credit (ITC) is available for almost all raw materials and services, reducing the effective tax outgo substantially. Furthermore, businesses can claim ITC irrespective of the location of the supplier of inputs. The input tax credit has encouraged many small businesses to register voluntarily for GST and become a part of the formal economy. GST has also reduced the cascading effect or ‘tax on tax’ caused by excise, VAT, and service tax. Earlier, suppose a good’s manufacturing cost was 150, and excise duty on raw materials was, say, 19. Because there was no way to claim the input tax credit, the seller would charge VAT on 169 to the end customer. This double taxation increased the end cost of the final product. Now, because the manufacturer can claim ITC on 19 (VAT), the end consumer has to pay tax only on 150. In August 2019, the GST council doubled the limit for exemption from payment of GST to Rs. 40 lakh from the earlier limit of Rs. 20 lakh. The new limit is a welcome change from the previous threshold limits of 5 lakhs (for VAT) and 10 lakhs (for service tax.) Businesses with a turnover of up to Rs. 1.5 crores can benefit from a composition scheme. Under this scheme, businesses now have to file returns only once every quarter instead of three to four times a month. Small business providers with a turnover of up to Rs. Fifty lakhs can also opt for a composition scheme and pay a GST of only 6% instead of 18%. According to the ministry of finance, these trade-friendly measures should benefit more than 35 lakh SMEs. GST has also provided relief to specific sectors like real estate. Earlier, homebuyers had to pay different taxes like VAT, service tax, stamp duty, and registration charges. Under GST, homebuyers have to pay a single tax rate of 12%. Furthermore, recently the GST council has reduced the tax rates on premium houses to 5% from earlier 12% and 1% from earlier 8% on affordable houses.
Boost to Digitization in Taxation: GST is considered as a digital tax as there is no manual intervention in the entire process. Be it registration for GST, filing of returns, uploading of invoices, claiming ITC, and refunds, the whole process can happen digitally. Now, even assessments by GST authorities can happen digitally. During the COVID-19 lockdown, when businesses were unable to generate digital signatures, the government allowed verification of GST returns through Electronic Verification Code (EVC.) GSTN (the nodal body for GST technology in India), along with its entire ecosystem of GST Suvidha Providers (GSPs) and Application Suvidha Providers (ASPs,) has given a big boost to the digitization of GST and ease of compliance. GST requires the filing of only a single return, thereby reducing the number of forms. In contrast, under the earlier regime, it was much more complex to file returns. For instance, businesses had to file excise returns monthly, service tax returns either quarterly or monthly (depending on the type of business), and VAT monthly. New tax software has further simplified the management of GST. Not only has GST made compliance easy, but it has also resulted in improvement in accounts receivables. Earlier, SMEs had to spend a lot of time and resources on tallying books and filing tax returns. With complete digitization, companies can now check their books of accounts on an ongoing basis. This digitization helps them in identifying any delays in payments receivable and ensuring timely follow-ups with defaulters.
Created Uniformity & Consistency: GST has transformed the business landscape of India by bringing about uniformity in taxation throughout the country. This consistency has proved advantageous to investors and traders who were bogged down by multiple taxes and ambiguity over tax regulations earlier. For example, earlier, there was no uniformity and clarity on the amount of ITC to be claimed if the final sale is at a discounted value. Individual states like Tamil Nadu had specific provisions for the reversal of excess ITC. GST has made ITC uniform and removed any correlation with the final sale value. In particular, uniformity has benefited the e-commerce sector. Earlier, businesses in this sector had to deal with VAT laws, which differed by state. Certain states did not require VAT, while certain states had more stringent requirements like filing VAT and mentioning the delivery truck’s registration number. Under GST, the government has clearly laid out provisions for e-commerce, which are uniform across the country. This resulting uniformity has also reduced logistics costs. Now, e-commerce players can set up warehouses in strategic locations instead of their earlier preference of VAT-friendly states.
Business-Friendly Follow-ups to GST: The advent of GST in 2017 was followed up by E-way bill compliance in 2018 and now E-invoicing (with effect from October 2020). Businesses can generate E-way bills or electronic waybills through a government website, SMS, or an Android app, making tax compliance easy for transporters. Electronic invoicing or E-invoicing will reduce data entry errors and enable real-time tracking of invoices. E-invoicing should also reduce the possibility of tax authorities’ audits since the information needed by them is available online at an individual transaction level. All of these changes have had a positive effect on the way India does business.
Conclusion: Overall, GST has made India, Inc. more compliant and more tech-savvy. Thanks to GST, more businesses have come under the tax net and are now a part of the formal economy. This formalization has made more businesses eligible for bank credit and other government incentives for MSMEs. India, Inc. can see GST’s impact at multiple levels, be it the improved efficiency in maintaining accounts or the user-friendliness of tax compliance.