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How enforcing input tax credit can hurt the MSME economy

Long before the Goods and Services Tax (GST) got Parliamentary approval last week, there were opportunities through draft laws for accountants, lawyers, tax-paying enterprises — even technology companies—to participate in its creation. “The government and administrative machinery are dialogue-oriented,” notes Bharat Goenka, managing director of software company Tally Solutions. Yet, the taxpaying community and government underestimated a statutory stipulation that endangers India’s small and medium enterprises (SME): input tax credit. “And that is our collective responsibility.”

Goenka, who had written to the GST Council about it last year, blogged on Tally’s website in early March (‘The Sin of Being Small’).

Enforcing input-tax credit can hurt the SME economy. Under the GST Act, an enterprise can reduce the tax already paid on inputs at the time of paying tax on output; this is commonly referred to as ‘input credit.’

It entails monthly computation of every B2B transaction with every party that a single company does business with. For enterprises, this means capturing every invoice for it to be corroborated against how the corresponding party (supplier or buyer) recorded that same transaction. This enables tax authorities to check if any business is understating number of business transactions and value.

Such computations have to be done across more than 6.5 million businesses. This mindboggling activity involves anywhere between 1.2 billion and 2 billion invoices getting uploaded every month. It makes the underlying technology (or platform) absolutely vital.

ENTER, GSTN
Simply put, GST accepts an indirect tax settlement only after the two parties (buyer and seller) agree on every single transaction, says Jaskiran Bhatia, partner at audit and financial advisory firm Deloitte Touche Tohmatsu India. “At a transaction level, you do a reconciliationand-match.” The GSTN infrastructure is crucial to capture that transaction-level data. It will evolve into a grand data store.

Incorporated in 2013, the GSTN is a private body that manages the software platform. By releasing secure APIs, it has already delegated the GST computation and processing tasks to 34 ‘GSTN Suvidha Providers’ (GSPs) such as Deloitte Touche Tohmatsu and Alankit Ltd.

The latter is opening 4,000 facilitation centres at its locations across the country, where GSTN-certified accountants (CA) and lawyers can bring tax filings in a raw format. Each facilitation centre will process the application and upload these filings to the network.

Small enterprises like kirana shops often depend on CAs and tax-return preparers. GSTN is looking to authorise such experts as GST practitioners (GSTPs) under the GST law, says Prakash Kumar, chief executive of GSTN. These include three kinds of experts. For chartered accountants, cost accountants and company secretaries, the GSTN has “already signed up with institutes of chartered accountants, cost accountants and company secretaries to validate the registration details of members of these institutes who apply for enrolment as GSTP,” Kumar said.

The second category is retired tax officials who are currently known as sales tax practitioners (STP) in states, and the third is of graduates or postgraduates in commerce, law, banking, or business management (which covers lawyers as well). For these two categories of GSTPs, respective tax departments will validate the application for enrolment after going through the documents provided by the applicants.

Tally is a GSP, whose clientele comprises SMEs that use its software. It has around 1 million legal users, of which more than 90% are SMEs. The GST Council’s push to comply will force pirated users of Tally to migrate to legal software. This new market is estimated to be around four times the current size of Tally’s user base. But Goenka fears it is bound to contract because of input-credit. SMEs have problems peculiar to their size, and worries large companies don’t have.

Goenka spelled this out in the March 7 blogpost: “Small business suffers frequent unevenness of cash f low. Even a simple one-week delay in receiving money for goods sold throws their routine out of gear.”

New developments in business affect their cash flows. “In emerging markets, most formal jobs are with SMEs, which also create four out of five new positions,” according to Simon Bell, global lead for SME Finance, World Bank. “However, access to finance is a key constraint to SME growth; without it, many SMEs languish and stagnate.”

The GSTN architecture is geared to record every invoice, and hold SMEs accountable. The problem for SMEs is, by law, invoices are reconciled only after the payments for those transactions are complete.

With cash-flow uncertainties, delays are common. Such delays can lead to the SME in question getting poor compliance-ratings from GSTN, which in turn upsets their ability to borrow. That’s why Goenka wrote: “A few proposals will slowly, but with certainty, drive almost every small business to eventual closure. This is not the INTENT of the government — it is simply an unexpected consequence of other good intent.”

An accountant explains with a hypothetical example. If there are two entities, and one has a number of Rs 75,000 on his invoice and the other entity has Rs 90,000, unless the two numbers match, they are not going to get the full credit. “You get a part credit for Rs 75,000 which becomes provisional. There are 60 days to take it up or the other entity brings it down. Otherwise, an interest gets charged. Your compliance rating gets hit.”

Most large enterprises dealing with goods have progressed significantly in GST implementation or started working on the plan, says Sachin Menon, head of indirect tax at advisory KPMG India. “Less than half of the mediumsized enterprises have initiated steps to implement GST. In the small and micro segment other than GST registration, there have been no significant steps to comply with regulations,” he explains. With the July 1 deadline fast approaching, the government has kicked off an outreach program to build awareness.

The idea of ‘one nation, one tax’ — or the GST — had taken a decade to see the light of day. But SMEs, the worker bees of India’s economy, have had other problems to cope with, especially after demonetisation in 2016.

SIZE DOES MATTER
Most estimates agree that the number of micro, small, and medium enterprises is more than 30 million, employing around 100 million people. Post demonetisation, many of the micro and small enterprises faced cash-flow disruptions. Goel Engineers is a two-decades-old SME in Faridabad, whose factory makes perforated metal sheets. Owner Chander Shekhar Goel says: “We asked staff who were paid in cash only (a norm at most micro enterprises) to accept cheques. But they found opening bank accounts challenging.” Two of its 10-people staff quit, which affects a lean enterprise.

Sangam A Kurade, chairman of 100-people agriculture products company Zuari Foods & Farms, says: “GST is complicated for small companies. I foresee issues in how to do it, at least in the first quarter of implementation.”

“All transactions get illuminated and will be difficult to hide,” says Anil Bhardwaj, secretary general Federation of Indian Micro and Small & Medium Enterprises (FISME). But most of these companies are neither tech-savvy, nor as nuanced in maintaining financials and keeping their books updated as their large counterparts. GSTN will call for a behavioural shift in less than three months in India’s oceans of SMEs. Many fear that with GST offices empowered to cancel registrations, it has given room for exploitation.

“Most companies are too small to afford a full-time accounts office,” Goel says. In the current system, VAT or excise returns have to be filed once in three months. Under GST, returns (sales, purchase) have to be filed thrice a month (on the 10th, 15th and 20th). “Working capital needs will increase. We might have to hire a full-time accountant,” he adds, also citing investments in software and hardware. Goel, who uses one Tally terminal, says his upgrade to GST compliant software will cost Rs 3,500-4,000.

For Dinesh Chopra, chairman of electronics goods shops Surya Softek in Delhi, which has 10 terminals on Busy (an accounting software), it is an additional cost of around Rs 35,000 for the upgrade. “Returns in e-commerce are high, ranging between 10% and 30%, taking up to two months,” says Chopra, who is also a seller for e-commerce companies. “Once GST is paid and when buyers returns goods, how will GST reversal happen?” asks Chopra.

In effect, if Surya Softek ships products to warehouses in 10 different locations, how will various locations (if in different states) account for input costs? “There are ambiguities, and I anticipate problems in the initial months.”

Many entrepreneurs insist there should be a trial run before actual implementation of GST. In the trial period, GST could run parallel to the existing system to smoothen the transition. Sudhir Singh, managing director of Marg Compusoft, which sold 10,000 GST compliant software licences in March, believes a September implementation will help companies prepare better. Bhardwaj of FISME says “all members of the supply chain will have to be disciplined for a smooth implementation.”

WHAT NEXT?
New Delhi-headquartered Alankit Ltd, a GSP, has always eyed the egovernance opportunity, notably SMEs. “We expect 70% of our business to come from small businesses. They are the backbone of the Indian economy and are underserved,” says Ankit Agarwal, its managing director.

For this, the company has built software solution that will link to point of sale (POS) machines to have real-time transfer of invoices to the GSTN system for SMEs. Small restaurants and shops connect to POS terminals which are primarily invoicing terminals. As soon as the invoice is generated it will get transferred to the GSTN system. Even if there is no connectivity, the application is equipped to hold the invoice till connectivity returns.

Meanwhile, the Big Four accounting firms will segue into SME territory because of large clients’ vendor base. “There is a requirement for everyone to be ready on GST compliance,” says Kunal Wadhwa, partner-indirect taxes, PwC, which seeks to be an ‘application service provider’ to several GSPs.

The GST regime envisages both offline and online uploading of returns and related information. Any SME whose turnover is less than Rs 50 lakh need not upload sales and purchase return or maintain input credit registers,” explains FISME’s Bhardwaj. It only needs to pay 1 to 2% GST on total turnover.

“The return is very simple and can be uploaded with the help of government-approved GST practitioners,” he adds.

So far, 57 lakh taxpayers have registered on the GST portal. Small businesses can use the offline app being developed by GSTN to file invoices. SME taxpayers can convert their invoice data formats into one which is compatible with the GST system. They can either do it manually (Excel) or use accounting software before exporting that data to the offline app. “Once downloaded on the computer, the offline app doesn’t need to be connected to the internet till the time of filing returns on GSTN’s portal,” Prakash Kumar adds.

“GST is a new animal and it will take time for things to stabilise,” says S Swaminathan, CEO of IRIS Business Services, another GSP. “As more learnings happen, the system will get more robust and stable.”

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