Why tech is backbone for structured GST compliance

Accessible, innovative technologies needed to help small firms create accurate invoices

Rakesh DubeUpdated: Thursday, June 02, 2022, 07:19 PM IST
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The government has already implemented e-invoicing for large enterprises, and we anticipate that by FY 23 it would be available to businesses with a turnover of Rs 5 crore or more. / Representational Image |

GST was supposed to weed out inefficiencies in the indirect tax system but five years down, while it has been able to achieve some of its objectives, a lot more needs to be done, especially when it concerns the smaller business entities. Before getting into the challenges this new tax regime has thrown up, it will be worthwhile to spend some time understanding what GST is and then try to find solutions to those challenges.

Background

In September 2017, India implemented the Goods and Services Tax, also known as GST. It is an indirect tax. The government had combined a variety of taxes (read indirect taxes) under one umbrella, i.e., GST. To make GST implementation even easier, the government launched e-invoicing in October 2020.

When launching the e-invoicing, global learnings were also taken into account. The government has also made it mandatory to file your GST return every month. Currently, approximately 1.34 crore business entities are subject to GST. The government has set up a helpline in the form of GST Suvidha Providers and Application Suvidha Providers to assist and assist these entities.

Input Tax Credit, industry's biggest challenge (ITC)

Your outward liability is the amount you must pay to the government and deduct from your Input Tax Credit (ITC). This must be exact, as incorrect ITC credit results in either a loss of working capital or the receipt of GST Show Cause Notices. Controlling the data of your outward and inward liabilities makes life a little easier. However, if you do not have control over the situation, you will have to spend some sleepless nights every month before filing your GST.

Your capacity to control incoming liabilities depends on how your vendor files GST. The government issues Form GSTR 2B on the 12th of each month to specify input tax credit claims. The government may send you a notice if your vendor fails to keep correct records and you claim too much. Your inbound duty is also affected by how you account for purchases, especially capital and prepaid purchases. The purchase of capital goods requires a separate GST declaration than other business-related purchases. If the purchase is a company input, it's deductible; otherwise, it's not. CGST and SGST apply to interstate transactions, while IGST applies to intrastate transactions.

Mismatches in the place of supply, ITC eligibility at the purchase order stage, and GST rate classification cause ITC reconciliation challenges across industries. These hurdles make reconciliation time-consuming and may require further supplier follow-up to correct/amend bills.

Digitalization is the key

When we look at which companies pay the most GST to the government, we find that it is the large corporations. They typically contribute close to 80 percent of the total GST paid to the government. Even though the majority of businesses with annual revenues less than Rs 500 crore are large, the amount of GST they pay is insignificant in comparison to large corporations.

The government is particularly focusing on smaller enterprises, as they often have trouble filing the GST. This is because these smaller organisations rely on local accountants to file their GST, who in turn rely on the information provided by these smaller firms. There is also a good chance that the accountant does not understand the nuances of GST, and inefficiencies may arise due to a lack of data. As a result, an incorrectly reported GST will not reflect the correct input tax credit for the other party. While this represents a significant challenge, it also represents a significant opportunity.

This is a unique opportunity because the government began e-invoicing in October 2020, which has greatly aided in the elimination of system inefficiencies. The government has already implemented e-invoicing for large enterprises, and we anticipate that by FY 23 it would be available to businesses with a turnover of Rs 5 crore or more. We need accessible, innovative technologies to help small firms create accurate electronic invoices

The way forward

In the future, I would like to see e-invoicing made mandatory for all businesses with an annual revenue of Rs 5 crore or more. However, it should be optional for businesses with an annual revenue of less than Rs 5 crore. Simply put, there must be coordination between the customer, the supplier, and the government. All three parties' books must be reconciled; otherwise, the government would have to issue notices and the buyer and seller will be under constant stress. This would also mean that businesses will be too busy extinguishing fires to conduct their operations in peace. We are working in this direction with the expectation that this day is not too far off.

(Rakesh Dube is Founder and CEO, TaxGenie-provides solutions on GST compliance.)

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