Presently, the indirect tax system in our country is on the basis of origin i.e. For eg: If Mr.A(in TN) sells goods to Mr.B(in AP), the tax collected on this sale will be a revenue to the TN government. However, under the GST regime, it is taxed on the basis of consumption i.e. For eg: If Mr.A(in TN) sells goods to Mr.B(in AP), the GST collected on this sale will be a revenue to the AP government.
• GST registration: GST registration is compulsory only if the annual turnover crosses INR 20 lakhs. However, if a registered dealer enters into a transaction with an unregistered dealer, the registered dealer has to pay tax on that supply (includes supply of both goods and services) under reverse charge mechanism. This liability has to be paid by the registered dealer to the credit of the government and cannot be adjusted against the input credit.
For eg: Currently, most of us do not pay any taxes on the expenses incurred towards office supplies, tea/coffee for employees/guests, freelancer payments etc. as the transactions are mostly with small time vendors/professionals who do not fall within the purview of any indirect taxes.
Under the GST regime, GST has to be paid by the registered dealers under reverse charge mechanism on all these expenses, in case it is transacted with an unregistered person.
This will affect the cash flow of a Company to a great extent. So, there is great impetus given to entities registered under GST and consequently all companies would want to associate with vendors/ professionals who are registered under GST.
• CGST/SGST/IGST: CGST (Central Goods and Services Tax) and SGST (State Goods and Services Tax) need to be collected in case the supply is made to a person/entity within the same state. IGST (Integrated goods and services tax) needs to be raised in case the supply is made to a person/entity outside the state.
Presently, if a Company bills its customers for services rendered, it is raised with a service tax of 15%. Under the GST regime, the CGST/SGST/IGST shall be accordingly billed as per the location of the supply recipient.
• Input credit: Currently, a Company can claim input credit only on the service tax raised on its input services. However, under the GST regime, credits can be claimed on the purchase of fixed assets, office supplies, etc. This would significantly reduce the cost of goods and services and also the GST outflow of a Company due to seamless credit available.
The challenge in claiming input credit, under the GST regime, is that the tax paid by the supplier and input credit claimed by the recipient needs to be match, which will be done by the GSTN portal. Any discrepancies arising should be rectified by the supplier or recipient within a period of 2 months. So, vendor relationship plays a great role here or else companies/entities will end up paying taxes for vendor defaults. Make sure you are in their good books.
• Return filing: Presently, in case of trading companies, it is mandatory to file close to 12 returns in a financial year and in case of service companies, 2 returns are to be submitted in a financial year.
Under the GST regime, approximately 37 returns should be filed in a year. This increases the compliance cost for any company, even more so for a startup.
• Refund of taxes: GST would improve the system of processing of refunds. Online application needs to be filed on the GSTN portal for claiming the refund. Since all the data will be uploaded electronically and nothing is manual, calculation of refunds will be automatic from the data available online. Please be sure about the authenticity of the date you upload in the GSTN portal.
So, exporters claiming refund of tax under duty drawback and other schemes stand to benefit a lot.
The GST regime is going to bring in a drastic change in the operation of a business. As is the case with any new law/regulation, here is going to be a lot of confusion and chaos in the days to come. Companies and startups need to have professional help for a seamless transition and also setting in processes to ensure operations are not affected.
Note: The Government has relaxed the due date for filing of returns for the first 2 months ie.for July 17 and August 17.
Going forward, it is extremely crucial for all companies to ensure proper systems are in place for vendor registration, accounting, invoicing, return filing and vendor reconciliation, without which it would lead to an enormous business impact.