Here’s how enforcing input tax credit will dent the SME economy

Long before Goods and Services Tax (GST), India’s biggest tax reform since independence, got approved by the parliament, accountants, lawyers, tax-paying enterprises and even technology companies had a chance to participate in its drafting by sending their suggestions and apprehensions.

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However, neither the taxpaying community nor the government could make good use of these laws; as a result, India's small and medium enterprises (SME) are facing a huge threat in the form of input tax credit.

As per the GST Act, an enterprise can reduce the tax already paid on inputs when it is paying tax on output; this is commonly referred to as 'input credit.'

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It necessitates that every B2B transaction that a single company does with every party be computed monthly. As per this, enterprises have to capture every invoice to confirm how the corresponding party (supplier or buyer) captured it.

Tax authorities can then be able to check if the business is understating the number of business transactions and their values.

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In India, there are more than 6.5 million businesses that have to do these computations; this means that there would be around 1.2 billion to 2 billion invoices getting uploaded every month, and that too after both parties agree on every transaction.

"At a transaction level, you do a reconciliation and-match," says Jaskiran Bhatia, partner at audit and financial advisory firm Deloitte Touche Tohmatsu India. The GSTN infrastructure is needed so that transaction-level data can be registered, thus making GSTN a grand data store.
GSTN, the private body that manages the software platform, has already delegated the GST computation and processing tasks to 34 'GSTN Suvidha Providers' (GSPs), which can further open facilitation centres across India.

The GST Council's push for every SME to comply will force companies to migrate to legal software for recording transactions so that no entry is lost or wrongly entered out of manual error.

The problem, however, for SMEs is that invoices are reconciled only after the completion of payments, a practice by law.

These payments often take time because of cash-flow uncertainties, which would mean delays in registering transactions and getting poor compliance-ratings from GSTN. This would dent their ability to borrow.

As per most estimates, the number of micro, small, and medium enterprises in India goes up to more than 30 million, and the number of employees in these enterprises could be as much as 100 million.

SMEs faced several problems post demonetisation, mainly in the form of cash-flow disruptions. And with July 1 approaching fast, these companies are clueless about the impact of GST on their businesses. They will be forced to undergo a behavioural shift in less than three months, and the fact that most of these companies are not tech-savvy or don’t have dedicated accounts departments makes it all the way more difficult.

Many entrepreneurs thus insist on a trial run before GST gets implemented, during which it could run parallel to the existing system so that the transition can be eased.

Others think there should be more time and a September implementation will be better.

(Image source TOI blogs)