Impact of GST on Traders

Pramit Pratim Ghosh |Updated on: January 10, 2022

On October 14^th, 2016 the Confederation of All India Traders (CAIT) signed an MOU with Tally Solutions in order to train their member businesses – roughly 6 lakh traders all over the country, on the subject of GST. While the focus is largely to enable the trading community to appreciate and accept the importance of digital technologies, this association will serve as a guiding light to traders all over the country as we have embraced GST from 1st July.

The fact that one of the largest trading associations in the country has chosen to educate themselves a full 8 months in advance, goes on to show the impact GST is bound to have on the millions of traders in the nation. Here’s understanding in a little more detail, how life will change for a trader post GST.

Points of Delight

Increased threshold limit for registration

In the current indirect tax regime, INR 5 – 20 lakh is the threshold limit for VAT registration in most states. In Goods and Service Tax, 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 will come about – which means that more number of traders are expected to get tax relief. This will especially help the case of 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.

Composition levy increased

In the current system of indirect taxation, the composition scheme levy is INR 50 Lakhs in most states. In recently held GST council meetings, the proposed composition threshold limit was 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, more good news might await the Indian trader - as per the recommendations of the GST council, the government may further increase the threshold limit of 75 lakhs to a maximum of 1 crore.

Availability of ITC for Excise

Currently, most traders across the country have only VAT registration, and are not registered under excise. As a result, a trader is 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 utilise the same to off-set his tax liability – all, with a single registration itself.

Availability of ITC for input services / business expenses

Currently, traders were not allowed ITC on tax paid for input services which were utilised in the course of business. In GST however, the concept of “furtherance of business” has been introduced, whereas a trader can avail ITC on services utilised in the course of business such as advertising services, promotions etc. This will boost his profitability and have a positive impact on his working capital as well.

Full and immediate ITC on purchase of capital goods

Currently, the ITC against the purchase of capital goods, is not immediately available to the trader, and that too, it is available for only some specified capital goods. In most of the states, the ITC is made available in the form of instalments spread across several months; in others, the ITC is available only when the capital goods are put to business use. However, once GST comes, the treatment of capital goods and goods for trade will become the same, and full ITC will be available on the purchase of capital goods itself – again something that will have a positive impact on a trader’s profitability. The only notable exception would be motor vehicles, on which ITC cannot be availed, unless used for providing taxable services – such as transport of passengers or goods or imparting training on motor vehicles.

Opening up of markets across India

In the current scenario, sale and purchase of goods within the state are preferred compared to transacting with suppliers and customers across other states – primarily because of the inability of the buyer to claim ITC on the CST paid, leading to increased price for the end customer. However in the GST regime, CST will be replaced by IGST, the credit of which will be available seamlessly, thus placing both inter-state and local traders on the level playing field. Another additional advantage will be the removal of entry taxes, as goods cross state borders. What this will do is ensure 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.

Points of Caution

Blockage of ITC due to non-compliance by supplier

In the GST regime, compliance in general and ITC in particular will be 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 similarly matched and acknowledged by the supplier. In short, if a supplier chooses to default, this will lead to loss of ITC for the trader. Ideally, this will lead to ‘compliant’ traders not dealing with ‘non-complaint’ ones – but at the cost of a one-time loss of tax credit. 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 becoming a taxable event

In the current regime, stock transfers are not taxable – provided Form F is furnished, VAT is not charged. However, input VAT credit is reversed at a certain percentage (4% in most states), and the rest is available as credit to the trader. In the GST regime, stock transfer will become a taxable event. While the tax paid will be available fully as credit and also, there will be no need for credit reversals – this will have an impact on 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 will of course nullify the impact of stock transfer on the working capital of a trader.

Compliance activity and costs

On the face of it, compliance activity for a trader will seemingly go up under GST – 4 VAT returns per year (quarterly) in some states to 12 VAT returns per year (monthly) in some, will be replaced effectively by 37 returns per year (3 monthly and 1 annual) in the GST regime. However, if we analyse the current compliance activity – it is usually submission of monthly returns via forms, followed by submission of annexures with details of sales / purchase transactions to calculate the correct ITC. Thus, the activity per say remains the same, even when GST comes in. However, the depth at which the activity will be done will be more under GST, 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 only increases if one has operations across states, since each state will require a separate registration. Service providers are bound to bear the brunt of this change as they shift from a centralized service tax regime to a decentralized supply of services under GST. Traders, will thus need to invest in the right GST software and technology to ensure that the work gets done accurately, yet timely – which of course, will entail additional costs.

Points of Contention

E-Commerce

For traders on e-commerce platforms, GST certainly brings cost reductions in the form of availability of input credit and the levy of a single tax on supplies across the nation. It is expected that it will be easier to do business in the GST regime with greater clarity on the treatment of e-commerce transactions and uniformity in the taxes levied. However, traders must also be prepared for the impact on their cash flows - due to tax collection at source (TCS) by e-commerce operators, non-compliance by their vendors and payment of taxes on a monthly basis. Most importantly, compliance activities will also increase for e-commerce traders in the GST regime due to mandatory registration; in short, they cannot opt for composition levy even if their aggregate turnover is less than INR 75 Lakhs. Awareness of the compliance requirements under GST, proper training of resources to handle these requirements and use of technology to make all this easier will ensure that e-commerce traders can capitalise on the new era of e-commerce in India.

Reverse Charge

Under VAT, on purchases made from unregistered dealers, the recipient (registered dealer) of goods has to pay a tax called Purchase Tax. Under GST, the same concept has been retained by the Government under the name of Reverse Charge – primarily to ensure, that the tax is collected on the sale of goods or supply of services from various unorganised sectors. Under this, the liability to pay tax rests with the recipient. This is applicable on specific supply of goods and services, specified by the Government. However, a person liable to pay taxes under reverse charge mechanism will require mandatory registration.

E-way Bill

In the GST regime – while, there will be a minimization of trade barriers as the corresponding taxes would have been subsumed under GST, the implementation of the same will be easier said than done. Under GST, a registered person who intends to initiate a movement of goods of value exceeding INR 50,000 will need to generate an e-Way bill. While the intent is to unify the Indian market and assist smooth flow of goods, the entire process is cumbersome. It requires participation by the supplier, the transporter and even the recipient - who has to communicate his acceptance or rejection of the consignment covered by the e-way bill within a short span. Thus, there is a fair chance that whatever savings are generated by virtue of reduced inventory costs, may get evaporated while covering compliance and associated technology implementation costs. However, once the initial barriers have been crossed and with greater adoption of technology, the current logistical complications are expected to reduce over a period of time. As such, the government has decided to stall the implementation of e-way bill, till the systems are ready, as per the recent notifications.

Conclusion

All in all, GST is good news 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.