With Goods and Services Tax (GST), there has been an essential move in how your books are maintained. Till now in the entire tax regime, the main adaptation of the fact of the matter was the way you maintained your books. Every one of your filings spilled out of that.
In the GST era, there is one arrangement of detailing where several parties reveal about their transactions with you. The Goods and Services Tax Network (GSTN) as a common database consolidates and has brought together the perspective of what your business is. It also has associations with the customs, banking channels, income tax and so on. What’s more, it gives the taxman a full view of what you are answering to each entity.
What this in the long run implies is that it was easier to be a non-compliant earlier. You can rely on your chartered accountant and tell him, “Okay, this year I want to pay this much tax, please set up my books accordingly.” But, now this will turn out to be extremely troublesome in light of the fact that others have reported to GSTN and henceforth tax authorities know all the details.
One of the major moves that organizations require is to ensure that the books of account that they maintain are fully in sync with GSTN has and they are reconcilable to an external third party. Every transaction that streams into your bank ought to be aligned to some other transaction which is reported by someone else.
Beyond the filing and the IT part of things, it is vital that you know your provider and your client well. On the off chance that your provider has not paid their tax, you will not get input credit. For instance, let’s take a very simple three party transaction between A, B and C.
Let’s say they are transacting and A sells Rs 1 crore worth of goods every month and B works on it further for Rs 1.2 crore and the following party C sells it at Rs 1.5 crore. At an 18% tax rate, the overall tax liability for the government would be 18% of Rs 1.5 crore. In any case, in between if B defaults, then A has officially paid his 18%, which is Rs 18 lakh taxes to the government, yet B is not ready to pass that credit to the following party in chain, which is C. In this transaction, C who was earlier required to pay just 18% of the value he was adding, that is 18% of Rs 30 lakh adding up to Rs 5.4 lakh, will now end up paying tax on the entire Rs 1.5 crore, which implies an outflow of Rs 27 lakh. Also, the delicate part with GST is that C will get to know about B’s default just two months down the line.
In this case, if B has defaulted, his credit might be turned around following two months, which implies C is as of now transacting with him for two months post his default. If there are further defaults by B, an outflow of about Rs. 40 – 50 lakh extra could possibly kill a business. This implies it turns out to be vital to know who your vendor is, how well compliant they are and if they are not compliant then you need to change your vendor.
This also implies you as an entrepreneur need to ensure that you have adequate credit consistently. If you are running your business on a tight budget, which most SMEs do, it might be a great time to reexamine how you run your business. If there is ever a circumstance where rather than Rs 5.4 lakh your tax liability suddenly progresses toward becoming Rs 27 lakh you require enough headroom to hack up that amount to remain GST compliant. If you are not compliant, your GST ratings will endure. When that happens, you will eventually not be able to discover new buyers or your existing buyers will get away from you.