India is in the grip of GST fever. From this Saturday, over 85 lakh firms would be required to upload every detail of their business transactions onto the GST Network.
India is in the grip of GST fever. From this Saturday, over 85 lakh firms would be required to upload every detail of their business transactions onto the GST Network. From the largest firms to the smallest mobile phone sellers, everyone is busy getting ready for the new tax law. They are both excited and nervous.
Excited as most people find the basic promise of GST compelling. Firms would pay less number of taxes (One GST replaces 17 taxes), less amount of tax (average GST rate for industrial products is 18% compared to 25-28% of tax burden now), and face less tax on tax incidences. The uniform GST rates across the states would further reduce the tax burden and compliance cost.
Plus, no more hiring of a large number of staff to pay many taxes levied at the central, state and local levels, each with a different tax compliance system. No need to maintain a cozy relationship with the tax officer. All one needs to do is register with the GST Network website, fill the prescribed online forms and pay tax. Elimination of physical contact with the tax officer will be the game changer, many argue. The general mood is that GST will make doing business transparent and profitable.
But there is nervousness over a few provisions of the law. Many firms sense they may need more working capital to carry out day to day business. This can happen in at least three ways.
One: A firm will need to pay GST while shifting its products from the factory to its warehouses located in different states. This money will remain blocked until these products are sold.
Firms selling seasonal products like ACs or heaters where production is throughout the year but sales peak only for few months will see blockages for longer periods.
Two: A buyer’s money would remain blocked if the seller does not pay tax on time. Let us understand this with an example. Firm A buys fabric of value Rs 100 for making a shirt. The GST rate on the fabric is 5%. Firm A pays Rs 105 to the seller. But if the seller fails to pay Rs 5 to the government as GST, Firm A cannot claim input credit. So post-GST, a firm has to worry not only about his business but also ensure his business partners pay tax and file returns on time. Firms buying from a large number of suppliers are nervous on this.
Three: An exporter’s money would be blocked because of the gap between payment of GST and its refund after a few months. Exporters currently get an exemption from the payment of taxes on inputs used for making the export product. But under GST, an exporter will have to first pay tax at the time of buying of inputs, and seek refund of this tax after the exports which may take place after many months. This will make exports expensive as firms have to borrow money to pay tax and interest. GST exemption would be available only to firms located in a SEZ, creating arbitrage in favor of the SEZs. Canada, Australia, Malaysia and many other countries allow exporters exemption from payment of taxes.
There are worries that affect a certain class of firms. For example, firms located in states such as Himachal Pradesh and Uttarakhand that offer area based exemptions are worried as those exemptions will no longer be available. Producers of wheat or rice that attract zero GST worry as the tax paid on buying of pesticides, insecticides, or tractors would not be refunded.
A mobile phone dealer will have to pay tax when he receives advance money against the booking of say 2000 phones. The worry is not the tax but that he also has to provide details of each of the 2000 transactions in the return form GSTR-1, making compliance tedious.
While large firms worry about the large number of returns to be filed, small firms worry how they will manage even a single return online. But many of these were filing VAT returns online and will pick up fast after initial glitches. That’s where the GST Suvidha providers may come in handy.
As India prepares to become a GST nation, never before has a tax law had such large stakes or evoked such strong sentiments.
DISCLAIMER : Views expressed above are the author's own.