Though the squabbling over the Goods and Services Tax (GST) seems endless, it would probably become a law this year. The move will set into motion immutable tax reforms which will signal a paradigmatic change in the Indian taxation system. It will affect every member of the society and the business world, such is the all-encompassing nature of the change; from an entrepreneur to a bureaucrat to an industrialist to a person on the street. With the GST looming large on the horizon, it’s not hard to imagine the huge number of modifications that one would have to make to be tax compliant.
Fundamental changes effected by GST
The tax system is a huge complex machinery where all parts are related to each other. Enterprises need to be aware of which taxes to pay, how the tariffs apply, the quantum of the taxes and the procedures for calculation. The smallest change in the tax chain leads to a domino effect, affecting the entire structure from the top to the bottom. Making a mistake can lead to a fattened tax bill. In such a scenario the tiniest change gets magnified and has the potential to upset the accounting processes of companies. But if you plan ahead of time, apply for the proper deductions available, and prepare your tax returns properly, you can actually save on taxes. Let’s first look at the basic changes effected by the GST and the challenges that lie ahead for enterprises in adapting themselves to the new tax regime.
The GST would be a comprehensive indirect tax on manufacture, sale, and consumption of goods and services throughout India. It will replace taxes that the Central and State governments levy. Tax would be collected at each stage on the basis of the input tax credit method, allowing registered businesses to claim tax credit to the value of GST they paid on purchase of goods or services as part of their normal commercial activity. Goods and services are not distinguished from one another and are taxed at a flat single rate in a supply chain till the goods or services reach the consumer. In the dual-rated GST system, while exports are zero-rated, imports would be taxed two way: Central GST and State GST. Thus, all state-administered taxes such as Excise, VAT, Octroi, and Service Tax, will be replaced by a single unified tax across the country and would be divided between the Center and the states.
The government expects the GST will unshackle India from red tape and improve the ease of doing business but how the industry will take to the new change will get apparent only after the implementation of the law. The changes in the proposed indirect tax system could reduce transportation cycle times, enhance supply chain decisions, lead to consolidation of warehouses, etc. which could help the logistics industry reach its potential in terms of service and growth. The logistics industry would have to start exploring different supply chain models with their clients and at the same time develop a completely synchronized ERP accounting system to support inventory supply management as required under the GST regime.
Multiple modules will have to be created such as those for input credit, destination system, twin rates, exclusion, and other factors in the GST. Industry pundits are however keeping their fingers crossed as several contentious issues remain, such as the clear definition of supply, supply chain management through warehouse engineering, credit allowance during the transition phase, classification of goods and services under GST, etc. But one thing is clear: enterprises—big or small—will have to bear the economic burden of changing from one tax system to the other.
How do enterprises do their tax computing?
Enterprises deploy specialized software, also known as enterprise resource planning (ERP) software, for handling their accounting as the process gets simpler, easier, foolproof and automated. Indian tax accounting software is designed keeping the country’s regulations in mind. Therefore, apart from training their employees, working afresh on their invoices and meeting new compliance regulations, companies will have to modify their accounting software used to generate invoices and payroll. It would entail developing tax accounting software from scratch.
“The GST is basically a complete overhaul of the existing tax system. Enterprises will have to start preparing for it. The transition may be difficult for companies using old systems, particularly, if companies that provided them with the software in the first place have shut down and they do not have the codes for development any more. In such a case, it be difficult to adapt the software to the changing times for moving beyond Excise, VAT to GST. Such enterprises will have to go for new vendors, who have the technology to deal with GST,” said Shashank Dixit, CEO, Deskera—a business software provider in the Asia-Pacific region.
Leading market players building tax compliant software ecosystems
Market players such as SAP, Tally, Deskera, have started building software systems that would take the challenge head on.
“We know the GST thoroughly as we have been active for a long time in the Singapore market which has the GST system. Therefore, our software is GST ready and we can help Indian enterprises make this transition painlessly. Our software will certainly support the new compliance requirements,” claimed Dixit.
Several big players claim that their software would be able to handle the GST. But it’s only time which can tell how many of them are able to tackle it. In the quickly changing tax scenario, the adaptability of ERP technology to GST will define market leaders in the business software segment. It can be the nemesis of old, small, outdated or inadaptable systems or it can be the defining moment for those who adapt seamlessly. But one thing is sure: technology can make the transition painless for enterprises.
The author is Senior Editor, Deskera (Run Your Business).