Beware! After GST, Choosing a Wrong Vendor can Kill your Business
With GST, there has been a fundamental shift in how your books are maintained. Till now in the entire tax regime, the only version of the truth was how you maintained your books. All your filings flowed from that.
In the GST era, there is one set of reporting that you are doing, but there are several parties who are reporting what their transactions with you are. GSTN as a common database consolidates and has unified view of what your business is. It also has connections with the customs, banking channels, income tax and so on. And it gives the taxman a full view of what you are reporting to each entity.
One of the fundamental shifts that companies need 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 flows into your bank should be aligned to some other transaction which is reported by someone else.
Beyond the filing and the IT part of things, it is very important that you know your supplier and your customer well. If your supplier has not paid their tax you will not get input credit. For example, let us take a very simple three party transaction between A, B and C.
Let us 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 next 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. But, in between if B defaults, then A has already paid his 18%, which is Rs 18 lakh taxes to the government, but B is not able to pass that credit to the next party in chain, which is C. In this transaction, C who was earlier required to pay only 18% of the value he was adding, that is 18% of Rs 30 lakh amounting to Rs 5.4 lakh, will now end up paying tax on the entire Rs 1.5 crore, which means an outflow of Rs 27 lakh. And the tricky part with GST is that C will get to know about B’s default only two months down the line.
In this case if B has defaulted, his credit will only be reversed after two months, which means C is already transacting with him for two months post his default. If there are further defaults by B, an outflow of about Rs. 40 – 50 lakh additional could potentially kill a business. This means it becomes very important to know who your vendor is, how well compliant they are and if they are not compliant then you need to change your vendor .
If you are not compliant, your GST ratings will suffer. When that happens, you will eventually not be able to find new buyers or your existing buyers will get away from you.
This article written by Manish Chowdhary, CEO, Tally Education, a subsidiary of Tally Solutions Pvt. Ltd. was originally published in The Economic Times
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