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By far, the GST amendment will be the biggest step the country has taken in ensuring economic integration.  While the draft law comes with a promise of economic growth, it poses several critical pitfalls that can adversely affect businesses in the country.

GST: Great or Gruesome

The trust deficit between the Citizens of India and the Government of India has plummeted to new depths when one reads the Draft GST Law (in case you have not read the draft laws, please click here to read it). In one fell swoop, a swathe of businesses is staring at their death knell – as instead of being the promising vehicle for growth, GST has the potential to destabilize all that is good.  On the bright side, this is still a draft law – and corrections can be applied, so that GST indeed becomes the Greatest Simplified Tax regime, and the biggest economic event of Independent India.  It has all the ingredients to become so.  Why then, am I sounding the danger bells?

The most critical cause of failure of GST will be in the transference of responsibility and liability of tax remittance to the customers of a supplier (Section 16(11)( c)). Basically, the law postulates that if a particular supplier has failed to comply with the law correctly – by furnishing the correct returns (Section 27(3)) and/or making the correct payment (Section 27(2))  – then its’ customers cannot avail the input credit, and if given, it will be reversed.

The origin of this provision lies in the history of tax avoidance through false representations by a small section of businesses[i] and the fact that it was not feasible for the Government to systematically contain this problem.  With the framing of this law, the Government hopes that the market will self-weed out the bad eggs – which is not wrong in theory.  What is wrong is not understanding the cascading consequences of doing this in practice – and the mayhem it will create.  While the effort for driving compliance will reduce, the consequential effect of businesses shutting down, and therefore collections going down, have not been treated seriously enough.

What exactly is the problem?

Let us understand this by visualizing a scenario.

Assume Business A operates on a retained margin in the range of 8-9% [ii]

Because it is (say) an SME, it buys without access to good credit terms.  So, it has purchased goods worth 50,000, and with GST of 20%, it has paid Rs. 60,000 for the invoice.  It now sells this at Rs. 55,000, with an applicable GST of 11,000 – so raises an invoice of Rs. 66,000 on Business B.

Business B is a distributor, operating on a margin of (say)  2% [iii]

Now, Business B is concerned that the input credit of Rs. 11,000 may or may not available to it, in case Business A is negligent in its compliance.  Therefore, it refuses to pay the GST amount UNTIL it can be certain to get the input credit (which is an entire ‘return’ cycle away).  So, it pays only Rs. 55,000 on an invoice valued Rs. 66,000.

Business A, in order to ‘get’ the balance due of Rs. 11,000, has to first finish all compliance requirements, including payment of Tax, when it has not yet ‘collected’ the Tax amount! In contrast, if Business B ‘trusts’ Business A and DOES pay the Rs. 11,000 – and if, for whatsoever reason (negligence, cash difficulties, mal-intent), Business A fails to complete the compliance, Business B will lose not just Rs. 11,000, but in effect, the ‘margin’ it makes on 10 other such invoices (since it operates on a thin margin of 2%)!

Critically, this is not just an ‘invoice to invoice’ problem.  Business A probably supplies to twenty-thirty people, and each of its customers will not have access to input credit due to any negligence of Business A!

Apart from this, there are going to be enough collateral problems.  For example, when the input credit is denied, will this be formally treated as a ‘business expense’ and not be taxed by Income Tax?  Obviously yes!  But at what point do I treat this as ‘contingent expense’?  Will my Advance Tax payments made on the assumption of ‘possible write back’ be accepted?  If not, will I be reimbursed for the cash-flow cost I incurred?  How do I report my end-of-quarter and end-of-year?  Will banks fund me?  Will insurance cover this risk?  How much more working capital will I require?  Will I be eligible for it?

When the input credit is uncertain and outside one’s span of control, the correspondent questions which will arise – and correspondent litigations can only be imagined.  The last two-three questions will kill a large number of businesses (SMEs, Distributors, Stockists, Industrial Retail, Commodity traders – who either work on wafer-thin margins, and/or with inadequate cash).

The reasoning of the Government is: people are today colluding (albeit in small percentages) to fraudulently take input credit when it is not due.  Therefore, it is only fair to put this risk back on the citizen.  It also reasons that because this is a small percentage, which will keep declining due to self-correction by citizens, it is not a ‘great burden’ – that is, the ‘business risk’ is small enough to be manageable.

The problem is not the ‘management of a manifest risk’ – the problem is the side-effects of cash flow, improper accounting, and reduced ability for people to trade with new suppliers and new customers – since there is uncertainty about the business outcome.

Is there a solution?

Of course.  One of the greatest benefits of GST is that it is built ground up as a technology-enabled-tax-system.

In the past, it was not feasible for the Government to systematically mitigate the risk of fraud, since there was no practical human ability to keep track and trace the culprits – who could/would repeatedly create phantom organizations, and/or phantom invoices.  Against this history, it is no wonder that the Government wants to control this menace!

However, GST gives extraordinary traceability.  For one, it fully eliminates the ability to have phantom invoices.  That alone, will massively reduce the problem. Secondly, with the near ubiquity of Aadhaar and the passage of the Aadhaar Bill, the Government MUST mandate that all GST registrations are traceable to individuals based on their Aadhaar identity.  Now, the ability to repeatedly create phantom organizations which allow credit to be taken without correspondent payment will rapidly evaporate. And, of course, the sheer traceability of the individuals, and strong public actions showcased for deterrence, will NOW become effective.

While Tally has been working to ensure that the right software is available to all of you to simplify and manage your business when GST comes, it will obviously not help to solve this basic problem created by the law itself.

Conclusions

GST has all the ingredients to be Great.  Making it practical and convenient, by removing this one MAJOR lacuna, will go a long way in its ‘welcome embracement’ rather than ‘resisted embracement’. Being technology led, it also has all the ingredients to spiral upwards the trust deficit, rather than spiral downwards. If all of us, as responsible citizens of India, rally together to help make it Great, we will all live together in a Greater and Grander India.

Bharat Goenka, Managing Director.
Tally Solutions Pvt. Ltd.

 

Notes:

To read the complete draft GST Law, please click here.

Our detailed representation to the relevant authorities can be found here.

[i] http://indianexpress.com/article/business/economy/blackmoney-govt-unearths-indirect-tax-evasion-of-rs-50000-crore-in-two-years-2793085/

[ii] http://www.crisil.com/Ratings/Commentary/CommentaryDocs/smes-present-strong-financial-profile.pdf

[iii] http://www.crisil.com/Ratings/Commentary/CommentaryDocs/smes-present-strong-financial-profile.pdf

144 Comments

  1. Avatar
    Rishi Bansal September 8, 2016 at 12:02 pm

    We wants to know about the taxation tax form i.e c, h , e-1 etc after the implementation of GST.

  2. Avatar
    JAGDISH MAKWANA September 7, 2016 at 4:42 am

    dear sir
    please provide gujrati language letrature gst law easily & simple nowlege

  3. Avatar
    JAGDISH MAKWANA September 7, 2016 at 4:40 am

    please gujrati transletion require our gujarat businessman & service provider easily corresondence

  4. Avatar
    Pawan Sharma September 5, 2016 at 9:07 am

    Excellent information sir thanks all tally team

  5. Avatar
    chnadan singh September 5, 2016 at 7:46 am

    Excellent information sir thanks

  6. Avatar
    chnadan singh September 5, 2016 at 7:45 am

    Excellent information sir thanks all tally team

  7. Avatar
    Raghvendra chaubey September 2, 2016 at 8:48 am

    thanks for information

  8. Avatar
    Lalit Kumar Poddar August 23, 2016 at 5:31 am

    Dear Bharat sir,

    After reading this i am feeling very pleasure that i am attached as an partner with a huge accounting software tally company.Want to go as far as the company will go.

    Thank You sir,
    Lalit Kumar Poddar

    Proprietor
    SHRI SHYAM SOLUTIONS
    Berhampur,Odisha
    M-9040984809

  9. Avatar
    BASAVARAJ V GURAPPANAVAR, HUBLI TALLY EXPERT,HUBLI August 20, 2016 at 1:06 pm

    VERY GOOD……GST DO MORE SESSION

  10. Avatar
    BASAVARAJ V GURAPPANAVAR, HUBLI TALLY EXPERT August 20, 2016 at 1:04 pm

    IT IS GREAT…….TALLY ROLE IS MAJOR IN GST

  11. Avatar
    P. Venugopal Reddy August 20, 2016 at 12:50 pm

    Sir,

    I twas a very good step by Govt of India to get on track GST bill to flow the fair business and to curb the tax defaulters.

    But it is now a good question that how the Input should be taken if the Manufacturer doesn’t comply correctly and a lot of questions arises like if the material supplied is not good the material is sent back, retailer doesn’t have any TIN and to give output and how to sell it to retail customers directly like it is does in E-Commerce, etc.

    The deadline is 1st April 2017 and the framework has to be started and the same have to be explained to the Manufacturers, Wholesalers, Traders, Distributers, etc.

    What is the effect on Proprietory and Partnerships.

    Govt has to take measures to bring all of them to understand the GST in Principle and Practice and GST to run smoothly.

    P. Venugopal Reddy.
    Hydeabad.

  12. Avatar
    Dinesh choudhary August 19, 2016 at 1:51 pm

    Gst bill laga dala to tansan ko dho dala

  13. Avatar
    Avadhut Kshirsagar August 19, 2016 at 8:12 am

    Excellent information sir, It will help us. ( A.K. Solutions )

  14. Avatar
    Arghya Mukherjee August 16, 2016 at 7:46 am

    suppose maan lo kisika vat hain but service tax nehi hain……..unko kya gst main 18% hi tax pay karna parega?????

  15. Avatar
    anil August 14, 2016 at 10:09 am

    iam buying from traders . vat is paid . ecixse is paid but not shown in bill .’
    what will happen to my stock on 1 april .
    how i will get diff credit that i paid .
    is my stock will be treated as tax paid .

  16. Avatar
    anil August 14, 2016 at 10:05 am

    can gst tax be not collected daily like shhare bazar type sysytem .
    all our daily bill bill go in gov server . immediate matching

    1. Avatar
      CA.B.C.Chechani September 3, 2016 at 3:16 am

      Real-time filing of invoices for real-time matching is the great idea

  17. Avatar
    rajesh August 14, 2016 at 9:34 am

    i wouldn’t agree the solution forced upon by Govt. it is not just to leave business fight /suffer among themselves. rather i have a solution for this – PREPAID GST. vendor will generate a “Tax paid code” by paying GST online and print the same on invoice. the buyer shall verify the code online and pay the amount. as simple as that! what more? govt is getting tax amount faster

  18. Avatar
    SHIV RATAN KHATRI August 13, 2016 at 7:08 am

    DEAR SIR,

    PLZ GIVE US PROVIDE DETAIL IN HINDI, PLZZZZZZZ

  19. Avatar
    Deepak Jadhav August 12, 2016 at 6:31 am

    Excellent information sir

    Thank you for guiding us

    Deepak Jadhav
    Samruddhi Industries Ltd

  20. Avatar
    Pratap Narayan Chaturvedi August 12, 2016 at 6:09 am

    Dear Sir,

    Thanks for your valuable input on GST “GST FUTURE IN INDIA”

    Definitely we responsible as citizens of Indian, to contribute something which is create easy our system and transform…

    Regards

    Pratap Narayan Chaturvedi
    09329203638

  21. Avatar
    G Manjunath August 12, 2016 at 5:57 am

    Very rightly pointed out . There have been any number of cases in Karnataka where the onus of ensuring the payment of taxes by the selling dealer has been passed on to the purchasing dealer. Small units without the wherewithal to engage in costly litigation have been the victims of these actions.
    If the same provisions are allowed to creep into GST, MSME’S will die a premature death.

  22. Avatar
    Prasanna P Hegde August 12, 2016 at 5:55 am

    Dear Bharat Sir,

    This is really very informative. We as Tally partners looking forward to ACCEPT the CHANGE.

  23. Avatar
    Ketan Vyas August 12, 2016 at 5:00 am

    Dear Bharat,

    While it is true that GST will bring its own complication, but unlike any change – Change is dificult to digest and moreover difficult to implement (more challenge towards acceptance of change) and we have the mentality of comparing the past with the present.

    Anyways, given that GST will be reality, we need to be prepared in best possible manner and would like to know what Tally as a partner is doing to ensure that their customer will be compliant with robust support of Tally.

    Thanks for your views

  24. Avatar
    Anil Chitlangia CHIRAG COMPUTERS August 10, 2016 at 9:20 pm

    Bharat ji, I was shocked at first glance, when I read that you do not expect the GST law to succeed, but as I read through, I could understand your cause of concern.
    You have rightly and timely pointed out the factor, which if ignored could create havoc in the market.
    Sir, I wonder what would be the scenario with end user, for example, if a consumer buys a Laptop and the retailer doesn’t pay due GST, though he avails credit as the whole-seller has paid his due GST .
    Filing so many returns in time and with accuracy will certainly require software to meet the compliance, so it will be good and busy time for Tally family.
    Wish you great times ahead 🙂

  25. Avatar
    Lalit Goenka August 10, 2016 at 11:55 am

    Carefully Study the subject Bharat ji.
    But long way to now even now also.

  26. Avatar
    Rakesh Chaturvedi August 10, 2016 at 9:35 am

    Great analysis Sir!
    Let’s ready for GST!!

    Regards,
    Rakesh Chaturvedi
    Ms Rudraksha Infotech (AP)
    Delhi

  27. Avatar
    andrewlee August 10, 2016 at 7:02 am

    Good for india Economy

  28. Avatar
    Ratan kumar August 10, 2016 at 5:57 am

    Dear Sir,

    It is great knowledge to understand GST

    and Implementation In Software

  29. Avatar
    Palak Agarwal August 9, 2016 at 3:10 pm

    Thank you B G Sir, for putting Limelight on the New taxonomy -GST, it help us to understand the GST Bill , why it is bad for short term but Good for INDIA’s Future.

    We also know that Tally will Help every SME to work with any Taxation policy with Comfort . Like Tally will give 7.2 for VAT. Like this we assure that Tally is ready for GST.

    Tally is a great Company with Emotions, Ethics & Integrity.

    Great Sir..

    Regards

    Palak Agarwal
    Version Software’s, Jaipur (Today We applied for becoming a Helping hand for Tally As Partner)
    9887529900

  30. Avatar
    neredukomma nagaraju August 9, 2016 at 5:33 am

    nice information sir
    nagaraju
    academy for practical accounting

  31. Avatar
    thiagarajan August 8, 2016 at 5:33 pm

    the goverment should trust the taxpayer ,has the common man trust the government.2000 years back tamil litature has well said how taxes should be collected. A flower with its colour and fragance attract butterfly and bees for cross pollination , allow them to collect honey without causing any harm to the flower . honey collection is like tax collection. the flower will not get hurt .

    1. Avatar
      Prasanna P Hegde August 12, 2016 at 5:57 am

      Well Said Thiagarajan.

  32. Avatar
    Dalip Saraswat August 8, 2016 at 2:30 pm

    Excellent and very good Information GST one tax all india.

    thanks
    your truly
    Dalip Saraswat
    Calculus computer
    Sri Ganganagar Raj.,

  33. Avatar
    PraveenKumar August 8, 2016 at 12:02 pm

    Dear Sir,

    Thanks for your valuable input on GST

    Thanking you,

    Praveen Kumar. R
    8147853928

  34. Avatar
    Amit Pandey August 8, 2016 at 10:55 am

    Great Lines sir, it’s very easy to understand the concept of GST.

  35. Avatar
    pandurang mete August 8, 2016 at 8:33 am

    Very Good Information about GST, One Tax in Country, I think this is so good for all businessman and Tally.ERP9 is fully ready software with GST.

  36. Avatar
    B Gopal Sharma August 8, 2016 at 6:24 am

    Very Good Information about GST, One Tax in Country, I think this is so good for all businessman and Tally.ERP9 is fully ready software with GST.

  37. Avatar
    naresh Pagariya August 7, 2016 at 6:45 am

    how can we work on tally on mac as it is such a common Operating system & Tally being so user friendly do not operate on that. do revert

    1. Avatar
      kumar February 14, 2017 at 3:53 pm

      Mac is outdated, pls update to windows and enjoy the benefits of tally. You can upgrade yourselves to seamless user experience in accounting & reporting in Indian environment

  38. Avatar
    Vinod Kaushik @ 9812024076 August 7, 2016 at 6:44 am

    Very Good Information about GST, One Tax in Country, I think this is so good for all businessman and Tally.ERP9 is fully ready software with GST …………… Thanks
    Vinod Kaushik INFOTECH 3 star certified partner Panipat Haryana INDIA

  39. Avatar
    C M JOSHI August 6, 2016 at 2:53 pm

    Sir, wonderfully information tally is always great

  40. Avatar
    SANJEET GUPTA August 6, 2016 at 7:35 am

    Excellent Info Sir
    SARASWATI ACCOUNTANTS SOFTWARE PVT LTD
    SANJEET GUPTA
    9891988004

  41. Avatar
    Karthik Winways August 6, 2016 at 7:28 am

    Thanks for your valuable input about GST and we share to our Partners.

    Regards,

    Karthik
    Product Specialist

    Winways Systems Private Limited
    Madurai. Tamilnadu.

  42. Avatar
    PRAKASH TUNIYA August 6, 2016 at 7:14 am

    its very good infermation.

  43. Avatar
    Unknown August 6, 2016 at 6:39 am

    tally.erp9 Release 5.x.x
    is best for trangulation reports

  44. Avatar
    Milind Madhukar Kapote August 6, 2016 at 6:16 am

    Very great information. We expect from GST support from Tally

  45. Avatar
    Mangal Jeet August 6, 2016 at 4:59 am

    WOW! This is awesome & well on time for GOI / FM to take corrective measures.

    Thanks B.G. Sir

    Mangal Jeet

    National Computer Training Center

    Bhiwani

  46. Avatar
    Vijay Gupta. (Star Electronics, 3* CPSI, Nashik) August 6, 2016 at 4:51 am

    Dear B.G.Sir,
    Thank you for giving such a good analysis of upcoming GST Tax regime. After knowing few points about the complexity in GST Set off, as a Better Citizen of Hindustan, can we make it a JAN ANDOLAN to make dealer/business men to understand, not to do any wrong practices, so that GST becomes a pleasure to live in Hindustan. And not be a punishment of good uniform Tax Regime? If your words become true, as such Hindustan Government is more keen to give benefits of 7th Pay commission to Job holders, small business community will extinct. Let us come together to fulfill the adaptability of GST.
    Thank you sir.

  47. Avatar
    Raja Sekhar August 6, 2016 at 3:21 am

    Thanks for Information

  48. Avatar
    SUDIP JAIN August 5, 2016 at 3:25 pm

    Your consent is logical but the situation cannot be as worse as you are thinking.
    In India taking input is very COMMAN in ED ( EXCISE DUTY ) & VAT (TAXES LEVIED BY SATE )
    Have you ever heard these things happened in CENTRAL EXCISE DEPT, ABSOLUTELY NOT.

    This same problem came in existence after VAT was introduced.
    Yes it happened a lot in VAT because the STATES were not so strong in IT .

    Over the period , STATE GOVT. understood the problem and applied lot of measures
    which ultimately resulted in bringing down these type of NOTORIES ACTIVITIES.

    One such example is J1 & J2 implemented by MAHRASHTRA GOVT.
    One such measure taken by CHHATISHGARH GOVT was to submit monthly sales & purchase
    details by all DEALERS of the STATE if the value exceeds 1 lac per month.

    India’s taxation process is getting MATURED day by day so I expect that these ambiguities
    will be sorted out as and when required by the MINISTRY OF FINANCE.

  49. Avatar
    Balaji Kannan August 5, 2016 at 1:49 pm

    Thanks for an insightful article Bharatji coupled with optimism that time still exists to correct potential risks foreseen.

  50. Avatar
    NILESH August 5, 2016 at 1:45 pm

    Sir Tally Release 5 can not download in Madhya Pradesh since long time more then a year ??? very slow process …

    1. Avatar
      Tally Solutions August 6, 2016 at 4:04 am

      Dear Nilesh, We are working on Release 5 VAT forms for MP, it will be available soon.

  51. Avatar
    Shailendra August 5, 2016 at 10:44 am

    Well, sir the Pandora box of GST has now opened, what happens next is on individuals imagination only. If scenerio mentioned by you happens it has to be taken care as soon as possible. We should share this information on social media at our level best so that some corrective measures can be taken by the top leadership.
    Hats off to your effort and alertness. Hope we would get more business friendly environment in years to come.

    Shailendra
    CyberTec Solutions
    Rewari

  52. Avatar
    I.Rama Lingayya.Tax consultent.Rajahmundry. August 5, 2016 at 10:35 am

    great infermation sir

    1. Avatar
      hari August 10, 2016 at 12:08 pm

      rama lingaiah sir thank u so much

  53. Avatar
    Manikandan August 5, 2016 at 9:35 am

    Thanks for the gud information.
    Tally always Rocks!!!!

  54. Avatar
    Arunkumar S August 5, 2016 at 7:44 am

    Thank you for the information.

  55. Avatar
    Arghya Mukherjee August 5, 2016 at 7:18 am

    Excellent……Thats Good. 🙂

  56. Avatar
    Alok Choudhari August 5, 2016 at 6:45 am

    Thank you for the detailed insight. Very well articulated. I hope the authorities understand this Lacuna and do the needful required to make India a greater country.

    Best Regards

  57. Avatar
    N K Punglia August 5, 2016 at 6:23 am

    Thank you for the information.

    AVI Technologies
    Raipur

  58. Avatar
    N K Punglia August 5, 2016 at 6:18 am

    Thank you for the information

  59. Avatar
    dr sunil mundada August 5, 2016 at 5:59 am

    I believe that even if the bill is passed without making changes to the section you have pointed out, it will be challenged in the court and will be struck down. After all, the person collecting GST and remitting it to the government, is in effect an agent of the government, and not of the buyer.
    VAT, and the earlier Sales Tax, operate without putting the burden of VAT payment on the buyer (unless there is strong reason to believe that there is fraud). I believe that this section will be used in the same way, and has been placed to take care of fraudulent transactionssec m vat act 48 (5).
    sir their should be mecanisem or if any party fails to pay gst it should be recoverd from him only not from his byure .

  60. Avatar
    Waahid khan {Accounts And Solutions} August 5, 2016 at 5:55 am

    Great Information about GST..

    1. Avatar
      Arghya Mukherjee August 5, 2016 at 7:21 am

      yes

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