The implementation of GST in a federal country like ours has been a long awaited legislative change. This promises easier trade across state borders and simplified compliance for many businesses that come under the purview of multiple taxes imposed both by the Centre and States.
In the longer term, it would result in reduced costs of operations for businesses making them more competitive. This anticipated simplification and ease of trade is also expected to bring in faster economic growth for the country. With all this being said, the ground level reality is 45% of the country’s GDP contribution is from the SMEs and they need to understand how GST will impact their businesses and GST will not succeed if they do not participate and contribute to its success.
GST is still complicated for many businesses. They have heard the big promises that this legislation will bring in, but business implications of those are not being fully understood. One area that we see is very important and can affect businesses is Input Tax Credit. The legislation around this aspect is very important to be understood in the era of GST, especially for SMEs.
The seamless availability of this Credit will determine the cost of compliance and the competitiveness of this business in the GST era. With the law allowing for several more areas from which a business can claim Input Tax Credit, a more disciplined business person can claim Input Tax across a larger bucket of expenses, thus reducing their cost of operation and directly increasing their net margins.
Claiming this Input, however, will be post matching of supplier and buyer invoices and timely compliance by your supplier in filing his returns and payment of tax. However, easy and sweet it may sound, it is not. Discipline becomes the key across the supply chain, in terms of maintaining records, filings returns and making payments. Indiscipline can hurt the chain in the short run and ostracise you from the ecosystem.
GST takes a greater step towards becoming a more granular law than the existing indirect laws in the country – GST is a transaction based, technology led law.
The government now expects a business to furnish all details of the transaction, meaning, all invoices made out to customers, and all invoices received from suppliers such that these details can be ‘matched’ using technology to determine the ‘validated’ Input Credit claims of the business. This detail will allow the government to tackle one of their big concerns regarding false input credit claims (leading to lower income for the centre and states).
Need for invoice matching
The introduction of Invoice Matching has a significant impact on the way a business operates, not just on the way a business complies. Today, it is possible to submit your returns at the end of the month since every transaction does not need to be uploaded and since the value of Input Credit availed by you is not dependent on the ‘real time’ acceptance of the tax liability by the supplier.
In the GST era however, Invoice Matching will now get many businesses to realise that their profitability and compliance depends on the compliance of their suppliers! This concept of Invoice Matching will force customers to start asking their suppliers to upload or accept the relevant invoices so that they know the supplier has accepted this tax liability – which in turn will mean that uploads and downloads will happen on a regular basis and not just at the time of the return.
Overall this long-awaited legislation is also going to bring with it, the ability to claim input across a larger variety of expenses if disciplined, and the need to start re-thinking about compliance being a part of daily business activity rather than a monthly or a quarterly or deal.