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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
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Excellent Information Sir
Very good sir
Great ..
Excellent Sir..
Excellent Information Sir
Vedang Enterprises
Pune
Release Video Tutorial of GST transaction in Tally.
THANKS BHARAT GOENKA JI GOODS
SANTOSH KUMAR
BAGHEL IT SOLUTIONS (DELHI )
Thank you for the information
Wonderful information
Mothercare Infotech – Tirupur.
Tamil Nadu
Well explained but credit of GST can always be checked on GST systems for all the assesse like TDS form 26Q
Interesting POV on GST, which appear to be more from practical and on ground facts
Respected sir
Excellent clarity on GST draft and must required to amendment to GST draft.
Thanks
Dear sir,
Good..
Archana Enterprises
Solapur
Thanks for sharing such a information B.G Sir. Hope soon the government consider this scenario in final Draft.
Nice presnetation in the right time, and honestly i wish you to congratulate you and your tally time that, with in the short period of time (say in months) you taught the commodity name, code, schdule to every registered dealer who use tally in simple manner and helped for filing tn vat return. Similarly, we belive you that you may well prepare to meet the requirment to fulfill the GST and ready to guide, teach in the same way. thank you why don’t you plan to open some outlet in chennai like airtel
Dear Bharathji,
I feel you have foreseen the Universal Busines Management Problem. If left unsolved, will eventually as foreseen by your article, I too guess, that small and Medium Enterprises suffer a lot. Inspite of Friendly Tax Environments and a BEUTIFUL ERP SOFTWARE LIKE TALLY ERP9, still there are lot of problems for SMEs unresolved. However, most of the problems relate to the Mangement.
But as highlighted by you, if law also creates additional problem, we are at Risk.
Sir, Your Approach and concern towards the GST is Appreciable and I believe current government also will leave no stone unturned while Final implementation of GST. As a fact Government also keep encouraging people to become entrepreneur/Self Dependent therefore their prior concern would be Ease of Doing Business.
On that note I believe ‘Everything works out in the End’ as a Indian Citizen.
accsoft solutions
Great foresight Bharat sir. You r always proactive
Rudrapur Uttrakhand
Great Sir
Sir,
Your information was helpful to every one.
Simplicity is the Best Ornament!
Thanks Sir for share this letter.
Regards.
Sanjeev Nagal
Bikaner, Rajasthan
Very useful information. I am surprised, how come these scenarios and questions were not considered by lawmakers.. I know this requires thorough understanding of different business scenarios and impact analysis skills. IMHO, people like Bharat Goenka Ji should be made a member of committee who is responsible for preparing drafts for such bills.
Thank You BG Sir for your valuable insight.
Thanks Sir for share this letter
excellent review
Simplicity is the Best Ornament!
Bharatji , well done.. you are find a very minus point of gst law which create diffrences and dispute cases between traders. Aadhar card n pan no. Also make it easy for govt.to creare a demand or case if any trader not depososite tax in time.. or deposite return in future.. any law related problem solve by govt..thats not public work.
I also with you…
B.M.CHANDAK
Excellent Information Sir
Hope Your valuable remark will be respond by Government
Wat a observation sir!!!
pls tell about calculation of CGST, SGST & IGST..
Is it single point of tax???
Regards
Ashindra Nath
thank u very much sir for such a wonderful explanation,it would be very difficult for small traders ,like us. to survive.
neeraj
We should not ignore our socio economy position Illiteracy is more important point Even 90/Or more MP s could understand what is GST Creating noise of growth employment BJP
Forcibly excueted it What a fun Nobody knows what will be outcome How far consumers will suffer It is a nontechnical analysis but should be noticed
Finally, GST Constitutional Amendment bill has been passed in Rajya SAbha.
Now it is on the State and Central Government how easy it make the GST Act for Traders, Business and consumers.
What rates are decided and how the states adhere to this ? How many type of Goods and Services are brought to lower level of taxes.
Rakesh Gupta
Global Technologies, Bangalore
Your information was helpful to every one, yours is great job.
Mr. Goenka,
Very valid points. If I recall correctly a similar situation is (was) seen with TDS. CBDT office memo F.No 275/29/2014-IT dated March 11,2016 has clarified that non-deposit of deducted TDS cannot be coercively recovered from assesses in such cases.
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 transactions.
Dear Sunil,
In Maharashtra , something similar to this is happening. If the seller has not paid the VAT collected or the his returns inadvertently shows a wrong credit, that much of input credit is disallowed to the assessee ( buyer ) during assessment. Matching of J1 and J2 is indeed a laborious process ,putting onus on the buyer to prove the genuineness of the supplier. Companies has already slowly started holding VAT pmts till credit is seen in the system. Again this has led to the big companies slowly moving the SME vendors out of its Supply chain .This alongwith MSME Act acts as a deterrant to promoting MSME.
Regards
MAnoj
Very nice BG sir
We need to look at sending this feedback to Central Government officially from Tally Solutions… and individuals concerned
Pursue until this gets resolved.
Excellent input on GST BG Sir.
Shashidhar T Gowda
SPSY IT Services
Great information
Superb Bharatji Truely Sir, GST will gives extraordinary trace ability or cent percent cent percent transparency and I am 100% agree with your concluding word
” we should welcome embracement’ rather than ‘resisted embracement’”.
Really very nice observation and question before the law makers….
Respect Sir,
Thanks for educating many people by writing openly.
We expect like this open column from you at least once in a month.
Thanks & Regards
Respected Sir,
Thanks for educating many people by writing openly.
We expect like this open column from you at least once in a month.
Thanks & Regards
Excellent Info Sir,,
I am impressed with your letter and like to thank for disclosing so deep knowledge analyses about GST, and all information you shared with is very true and accurate,
and as a legend of accounting software we all customers and non customers have expected this from you and your team,
we all appreciate your letter to us,
Mr Ashu kumar,
Asset Infotech Ltd
Great sir
Thanks you very much for sharing GST ACT. We are the first people to share the knowledge to our customers
Vasanthakumar K V
Sun Rise Solutions
Madurai
Your information is helpful to our customers. Thank you very much BG ji.
VISHWANATH J.K.
VAANAWILL COMPUTERS
MADURAI
Every thing is possible if circumstances facilite
Good information sir..
Krishna Gopal Sharma
Krishna Infosystems, Kanpur
Excellent Info Sir,
T info solutions
Hameed
9885441375
Greetings to ALL!!
Great opening Boss! really superb.. and Thanks for precise input in GST law !!
Greetings to all!
Bharatji has echoed one of the many scenarios that the new tax regime may present. It is also worthwhile to note many leading economies of the world have embraced the GST system and it is for us as a country to experience this transformation. Nevertheless, hindrances can be resolved by leveraging on the technology and this is the right point and time to re-emphasise the prowess of Tally! Have a great day..
IN ANY LAW RELATED TO TRADE, PROFESSION OR INDUSTRIES, THE LAW MAKER TREATS BUSINESSMEN OR SERVICE PROVIDER ARE THEIR SLAVES, & THEY ARE THIEFS/ROBBERS.
WHEN A AUTHORITY GIVE ON A BUSINESS LICENCE, AND ONE FAILS TO PAY TAXES & FILING RETURNS, CREATE AMASS DEMMAGE, ACTUALLY IT SHOULD NOT BE HAPPEN.
AUTHORITY HAVE SPECIAL POWER TO MANAGE ORIGINAL DEFAULTERS. THE RECOVERY FROM ORIGINAL DEFAULTER WOULD BE RESPONSIBILITY OF AUTHORITY & NOT FROM OTHERS LIKE TRADERS, PROFEESSIONAL & INDUSTRIES.
ALL RELATED TRADERS PROFESSIONALS & INDUSTRIES SHOULD ONLY RESPONCIBLE FOR HIS OWN LIABILITIES & NOT FOR OTHERS.
Excellent Info Sir,
Quest InfoTech Solutions
Hyderabad
Very true… But it is not the case where there is no solution to resolve the compliance problem.
Compliance burden can be reduced to very very small effort.
Let every seller report his sales transactions over a period of time… Say on a weekly or fortnightly basis.. The information received by system can be used to give credit to each buyer.. As sales are reported with respective buyers details, credit of taxes can be given automatically within a period of week or fortnightly basis and differential tax liability can also be automatically computed by the Department and than paid by the seller in the treasury.
The systems can reduce the compliance requirement of retailers and SMEs as they should not be required to claim credit but automatically receive the credit.
Thanks for the input Bharat.
I completely agree with the views given by Raghvenk Industries and also about the point mentioned by you.
In fact based on the rules given in draft law, buyer will get credit of taxes paid only if seller has paid the taxes o Government.
If Buyer ask the Seller to product document related to payment of taxes then how the buyer will ensure that the tax paid by him to seller is properly paid as the total Tax to be paid by Seller will cumulative of all taxes collected by him and most importantly why Seller will give his tax documents to Buyer ? This is another issue in proposed GST Law.
Also, why the buyer be denied Input Credit for no fault of his ?
Apart from his, default by one will have cascading effect on the others in the chain and will have more and more litigation.
The biggest question : WHY GOVERNMENT DO NOT THINK ABOUT SIMPLIFICATION OF LAWS SO THAT EVERYONE CAN COMPLY WITH IT.
M/s Raghvenk inds is right on their observations
All these days we were expecting the reference/input/Thought sharing from your side. Finally the wait is over. Thanks for sharing the concepts in Tally’s power of simplicity way.
The day when you are talking about Compliance in Tally we understand the statutory revolution. Thanks for your efforts.
While the desirability of the reform is not in doubt, making a transition to GST involves not only
considerable work but also formidable challenges.GST is quite different from the existing indirect taxation system in the country. For effective implementation of GST, tax administration staff – both at central and state levels – would require to be trained properly in terms of concept, legislation and procedure. The tax administration staff would also need to change their mindset, approach and attitude towards the tax payers. And for this, they would have to ‘learn, unlearn, and relearn’ the GST not only in letter but in spirit
Wonderful information, we have to start preparation of GST for upcoming financial year.
Really eye opener questions. Business needs simplicity. GST can make a Big difference in the way business is done.
Wow this is awesome & well on time
.pinakin Chauhan
A-102 Lalvatika flat
Mangalpura road
Ganesh chowkdi
Anand
Sir, well explained. In general buyers will pay tax when they are sure about getting credit in B2B. Consumers do not need to get credit so will pay full (retail/direct consumer selling). Alternatively , later, our government can arrive at a system where buyers who needs to get credit will pay TAX Direct against the purchase invoice and seller will get his money only not the TAX amount, and on paying the Tax amount buyer will be allowed to get credit, it will be very tough to monitor whether supplier has paid TAX properly, if responsibility is on buyer then in his/her own interest the tax will be paid properly and in time. sellers have to pay TAX only for their direct End User/Consumer sales. As a business house we practice same since VAT implemented, we pay VAT amount to our suppliers only when we are sure that returns are matching and we are going to get credit of the same.
WOW! This is awesome & well on time for GOI / FM to take corrective measures.
thanks bharatji for your forthright views! but there is another point to this VAT/GST taxation.
in trying to be systematic,and, all encompassing,the system has put forth so many compliance regulations and formalities that it takes a long time to post entries.
imagine a distributor, dealing in products of companies in multitude, and supplying to atleast 2500 retailers.the no. of entries to be posted,under the present VAT regime,product code wise,retailer wise,tax rate wise,etc.etc. is so terrible.i wonder if there would be any change for the better.Corporates can afford to have big offices,collect tax in advance(as they insist on advance payments)and comply with submission of returns much better and cheaper than people like us who have to spend more on compliance albeit with wafer thin margins.this government is definitely not SME friendly just as they are not FARMER friendly.they definitely LOVE corporates.
Excellent Information Sir 🙂
Kiran Kumar Reddy,
Veenus Cyber Soft Private Limited
Hyderabad
wonderful insights into proposed GST draft law proposals, well done Sir
Sir , its no big thing to hear / read the words of yours. Because I personally know how big is your vision and thought. Also it is no big thing for me that Tally shall be (may be the first one) having the GST compliance features on the very first morning of the new law being incorporated.
It has been many “Firsts” in last 28 years. So any further “First” is no big deal rather only a kid’s play.
Regards,
Great foresight Bharatji. You r always proactive. .
Vinayak Joshi . Pune