While GST is being touted as the most profound change that business in India is likely to witness, there is more happening that’s changing the way business is conducted. There is a steady nudge from the government towards electronic transactions, transparent reporting, stricter timeframes, etc, and discretionary power in the hands of bureaucrats is getting eroded. In such a scenario, is doing business becoming easy or difficult for small and medium-sized enterprises? Will competition increase or decrease? Is an entrepreneurial career really as rewarding as it is made out to be? And, how is technology driving change in business processes?
Tax compliance professionals CA Ankita Mathur, lead analyst, business services at H&R Block India Pvt Ltd; Manoj Yadav, co-founder, TaxSpanner; and Sathya Pramod, CFO, Tally Solutions, offers their views on these pressing issues.
By Deepak Gupta
Q. What new compliance challenges are small and medium enterprises faced with today?
Mathur: GST is aimed at increasing the taxpayer base. It will bring a large number of SMEs into the tax net, which are currently exempted under Excise Duty laws. Currently, SME manufacturers with annual turnover below `1.5 crore are not required to pay Excise Duty, but they will be liable to pay GST at applicable rate. This will eliminate their advantage over large manufacturing firms. Small scale services sector will also be strained by higher tax rates under GST compared to what they pay now. Lack of differentiation between luxury goods and normal goods will make it difficult for SMEs to compete against bigger players in the market. Input Tax Credit will not be available on GST levied on supply, this will increase the tax burden, and ultimately production cost for businesses which directly supply to consumers.
Let’s not forget that GST will bring major changes in the Indian indirect taxes framework. Learning the new tax laws, training employees, and aligning IT systems with new processes, will add significant cost in terms of both time and money. After initial implementation, it’s very likely that the government will make several minor and major tweaks in the GST framework to optimise it. Businesses will have to constantly adapt to the changes which will further increase the cost of compliance.
Yadav: Transparency in business transaction, proper maintenance of books of accounts along with timely filing of returns is the most integral part of GST. An SME will have to comply with the new business rules. The new compliances are now burdening taxpayers with more number of returns that have to be filed, which will lead to higher compliance cost. The lack of knowledge is another key challenge that SME will have to overcome. SMEs need to ensure accurate filing/payment of taxes after taking into consideration the credits available; to avoid excess blockage of working capital and to reduce consequences in the form of interest and penalty. Some of the businesses will have to redefine the entire supply chain to lower their taxes. In all, the compliance cost will certainly increase for SMEs.
Pramod: With GST coming in, at a top level, there is obviously the replacement of multiple indirect taxes with a single tax, which will bring down the complexity. This apart, the key challenges that will come in are from a technology perspective. In the GST era, there won’t be any paper/manual work involved. Everything from maintaining transactions to filing returns and to even making tax payments, will need to be driven through a business solution. There is also the need for businesses to shift online from their majorly offline behaviour, today. Another key challenge is the frequency of interacting with tax authorities (which will be GSTN going forward), which will increase dramatically, albeit physically.
Q. How should enterprises prepare for this paradigm change?
Mathur: Businesses need to upgrade their existing IT and accounting systems. Several software companies have started offering customised solutions in this direction, and partnering with them can help businesses speed up the process. They need to train their employees so that they can perform effectively in the new tax regime. It’s important for businesses to track the progress of GST to be able to adapt to new compliance policies effectively and quickly. They are required to upgrade their existing ERP systems by redesigning their ERP framework. It’s a basic necessity to handle the complexities of GST calculations. Companies should also encourage their smaller suppliers to begin preparations to switch to GST to make supply chains more efficient.
Yadav: Proper and timely training to business entrepreneurs and staff involved in compliance should help enterprises prepare for the paradigm change. Taxpayers should ensure transparency in business and comply with the provisions. There is no scope of leaving any compliance which will bite later.
Pramod: One of the most important things to do is to gain a basic understanding of the new law, its implications and how can they prepare for the change. Businesses should also initiate a dialogue with their tax consultants on how compliance will be managed going forward, especially with input credit, and monitoring the same is a key aspect of the business. So, it will not be the job of the tax consultant alone in making businesses compliant. Segregation of duties becomes an important aspect and business owners should play an important part in compliance. Business planning for the next fiscal year should be taken up keeping in mind that GST will be rolled out latest by September and will impact numbers, because of the chaos that any change brings with it. Also the fact that the input credit from the earlier regime can be carried forward to GST, it makes it even more important to keep the books ready for consumption. From a readiness perspective, a serious consideration needs to be given to technology adoption, being online, and training accountants on the new law.
Q. What’s going to be the impact of technology on business processes, going forward?
Mathur: A large number of businesses are mainly upgrading their ERP systems to handle the complex GST calculations. Those companies who have been using a system where every transaction is recorded separately will be required to upgrade to such a system where they can bring about a correlation between every entry. Using technology and automating processes will certainly ease the transition to GST.
Yadav: In the new regime, technology is a key driver to make business processes easier. If the taxpayer is religiously entering his transactions, the compilation of data will be much faster. Hence, there will be accurate filing of tax returns and other compliances. The controls of compliance are now shifting from human hand to software, which will deliver all compliances at the click of a button.
Pramod: GST by design is a technology-led law. This just means that everything to do with becoming GST compliant will have to be necessarily driven through a business solution. From a business standpoint, this is a big change that business people face. A lot of manual work that business people do today in terms of maintaining invoices will be automated, and reconciliation with suppliers and customers will happen online (the concept of invoice matching). Businesses have no choice but to adopt the right technology and become a part of a connected environment. While this is a GST mandate, it will simplify a lot of their business processes and make them more effective and competitive.
Q. Will enterprises have to invest in technology to be able to comply with new requirements? What will they have to invest in and what would be the quantum?
Mathur: GST will bring dramatic changes in the indirect tax structure. Companies have ERP and other accounting systems in place to handle finance and taxes. They will be required to make major changes in their systems to prepare for GST. Implementation of ERP systems is a costly and lengthy process, so wherever possible specific modules which will be affected by GST should be identified and upgraded rather than setting up the whole system from scratch. Despite this, investment in technology will certainly make transition to GST smooth. The quantum of investment will vary from company to company and depend on their existing processes.
Yadav: Enterprises might have to invest in technology to do the customisation in existing compliance software, according to the scope and need of the business. Training of staff for GST may create problem. They also need to strengthen the internal control system to ensure smooth functioning of business. For instance data security, restricted access of data to authorised persons, etc. Further, the quantum of the investment is fairly dependent on number of factors such as size of business, scope of business activities, complexities involved in business transactions, etc.
Pramod: The investment will depend on what level of automation businesses are at today. If businesses are completely dependent on manual operations, then the investment will be higher than if they are already using some business solution to manage operations. This is obviously contingent on their current solution provider having a clear roadmap for building a GST compliant product. Businesses should definitely talk to their current solution providers, if any, or start searching for the right technology to become GST compliant. The quantum of investment from our perspective shouldn’t be more than a few thousand rupees to begin with.
Q. What new skills will be required?
Mathur: Businesses will be required to invest in training programs for their employees so that they can perform under the requirements of new tax regime. Employees will not only be required to gain knowledge of the new provisions, rules or regulations but also get themselves accustomed with new ERP and accounting systems which will come into place.
Yadav: Trained professionals who understand the compliance rules and technology/softwares that implement those rules will be required.
Pramod: I think knowledge and awareness related to the new law will be more critical than any skills per se. This will lead to business folks making the right decisions at the right time which will lead to their business becoming more competitive and successful. There also has to be discipline with respect to GST compliance, becoming more tech savvy than before, and making the right choices in selection of vendors and suppliers, as availing of input credit will be dependent on this. More than skill, discipline becomes the key here.
Q. Will complexity of multi-location operations increase due to demands of compliance? Will technology make it easier?
Mathur: The Model GST law asks businesses to get state-specific registrations for every state they operate in. They will be required to maintain separate books and accounts for every premise. Multiple audits, assessments and refunds will be applicable for businesses operating in multiple states. This can lead to creation of state-specific committees to ensure compliance with the provisions of GST. The procedural follow-up of indirect taxes might undergo complete overhaul, which may result in new or revised forms, new laws regulating payment of taxes, filing of returns, audits, etc.
Yadav: The number of registrations under GST increases with increase in business locations, which will result in increase in number of filing of return. For example, for one registration a medium-sized retailer has to file approximately 37 returns. Complexity will also increase with regard to utilisation and set off taxes as interstate set off taxes is not allowed. However, technology and various software will make it simple and easy when it comes to collection of data from various location and accurate filing.
Pramod: First of all businesses need to rethink if they need multi-locations. Earlier for a local sale they may have needed, but does the business actually need it, is something they need to think about. If IGST can solve the problem, they should make effective use of the same. Lets take the case where IGST can solve the problem, then compliance decreases because what earlier was happening by filing VAT returns in different states, becomes just one return in the HO. Technology always strives to make things easier and simple, no two ways about that. So the key is to re-examine the business needs and figure out how efficiently they can work within the contours of the system.
Q. Can small and medium enterprises hope to compete with larger competitors, for whom budgets are no constraint?
Mathur: The situation is certainly going to be challenging for SMEs in terms of competition as they will lose major tax-based advantages they have been enjoying so far. GST will put all the businesses on the same level irrespective of their nature and size. Another challenge will be to manage high initial cost of compliance. However, in the long run, GST will spell out financial gains for every kind of business. So, GST is a two-edged sword due to some challenges it presents in the beginning but by adapting quickly and effectively, small and medium businesses can take advantage of GST.
Yadav: Introduction of GST will bring uniformity as far as compliance is concerned and hopefully small and medium enterprises will be able to compete with large competitors with available resources.
Pramod: GST being a ‘one nation one tax one market’, will promote commerce and every business large or small will stand to benefit from this change. Our estimates tell us that more than 95% of the business population in the country is made up of small and medium enterprises, so there really isn’t any direct competition with the larger guys. Everyone has their own market. Having said that, SMEs are the future of the economy and GST will treat them in a way that allows them to become highly successful in the time to come. When discipline increases, compliance increases, which will bring companies on the same pedestal. So, SMEs can get a level playing field.