The introduction of Goods and Services Tax (GST) is a landmark in India’s taxation regime. GST is hyped to simplify doing business in India, allowing supply chains to be integrated and aligned, as well as allowing for greater transparency. Here’s understanding in a little more detail, how life will change for a trader post GST.
Positive Impact on Traders
Increased Threshold Limit for Registration
Post GST, a unified threshold limit of INR 10 lakhs for special category states (Uttarakhand, Himachal Pradesh, Sikkim and the 7 NE states) and INR 20 lakhs for rest of India has come. This especially helps start-ups and new businesses, who can leverage on the increased limit, to concentrate more on setting up the business, rather than take the tension of compliance in the early days.
Increased Composition Levy
The composition threshold limit has increased from INR 50 lakhs to INR 75 lakhs, while that for Special Category States remained at INR 50 lakhs. For any trader, this extra margin of INR 25 lakhs is definitely a huge positive sign, as all he would need to pay is a floor rate of 1% GST computed on his turnover or 5% GST if he is running a small restaurant. Also, the government may further increase the threshold limit of 75 lakhs to a maximum of 1 crore.
Availability of ITC for Excise
Earlier, a trader was not eligible to take Input Tax Credit (ITC) for excise, which is ultimately passed on by him as cost to his buyer, leading to increased costs. Post GST, the cascading effect of taxes will be eliminated as CGST will be levied as an equivalent of excise. Since the full credit of input CGST will be available, there will be an unrestricted flow of ITC across the chain. An SME can thus utilize the same to off-set his tax liability with a single registration.
Availability of ITC for Input Services / Business Expenses
Post GST, the concept of “furtherance of business” has been introduced, whereas a trader can avail ITC on services utilized in the course of business such as advertising services, promotions etc. This boosts his profitability and impacts positively on his working capital as well.
Full and Immediate ITC on Purchase of Capital Goods
Post GST, the treatment of capital goods and goods for trade becomes the same, and full ITC will be available on the purchase of capital goods itself. The noteworthy exemption is motor vehicles on which ITC cannot be availed, unless used for providing taxable services such as transport of passengers or goods on motor vehicles.
Opening up of Markets across India
In the GST regime, IGST replaced CST, thus placing both inter-state and local traders on the level playing field. Another advantage is the removal of entry taxes, as goods cross state borders. This ensures that good quality products being manufactured in one part of the country will find markets in the farthest part of the country – opening up India as a common market for all traders.
Negative Impact on Traders
Blockage of ITC due to Non-Compliance by Supplier
Post GST, compliance in general and ITC is dependent on invoice level information – as invoice matching will be the key to avail the correct ITC. One of the genuine concerns hitting the trader under GST, will be the scenario of non-payment of tax by his supplier. As per the GST law, a recipient will get his due ITC, only if his supplier has uploaded all the correct sales invoices, which is matched and acknowledged by the recipient; and, any missing purchase invoices uploaded by the recipient are also matched and acknowledged by the supplier. In short, if a supplier chooses to default, this will lead to loss of ITC for the trader. However, traders can potentially avoid such scenarios, by effective vendor management in advance – identifying vendors who will be compliant, and keeping a watch out for credit rating before doing business with any entity.
Stock Transfer becomes a Taxable Event
Post GST, stock transfer has become a taxable event. While the tax paid will be available fully as credit and there will be no need for credit reversals. This impacts the working capital. This is because, for the tax paid on the date of the stock transfer, the ITC is available only when the stock is liquidated by the receiving branch. Thus, in case the logistics planning is poor, leading to overstocking at branches, working capital will be blocked for a long time – a direct challenge for SMEs who operate with thin working capital. With the seamless availability of credit on inter-state purchase and effective removal of state business boundaries going forward, there could be a potential reduction in the number of branches / warehouses – as they would exist solely for operational reasons rather than for compliance. This could lead to reduction in stock transfers, which nullifies the impact of stock transfer on the working capital of a trader.
Compliance Activity and Costs
Post GST, the depth for 37 returns per year (3 monthly and 1 annually) is more, as all transactions will need to be matched and filed accurately for the right compliance to happen, and the right ITC to be availed. The complexity increases if one has operations across states, since each state will require a separate registration. Traders must invest in the right GST software and technology to ensure that the work gets done accurately and on time.
Overall, GST is good for the trading community. As long as a trader smartly manages his business ecosystem, efficiently manages his supply chain and stays GST compliant – he will continue to reap benefits under GST. However, technology will surely be a game-changer in this regard, as this will be the only way the compliance burden of GST can be effectively absorbed, translating into more business benefits for the Indian trader.