“Tell us what other companies are doing for GST” is one question we face now-a-days, almost without exception, when we meet someone in a formal or even informal setting. An exam-like anxiety is slowly building up, especially with those who started preparing for the transition to GST late and now realize that they may be barely 12–14 weeks away from the big day. Here we will discuss precisely that.
A typical Goods and Services Tax (GST) build-up consists of three phases:
- Impact analysis: this broadly includes financial impact, supply chain impact, IT impact, impact on ongoing contracts, advocacy areas, etc.
- Re-validation of financial impact when actual rates are announced
- Actual GST migration of various business processes: finance, tax, accounting, procurement, sales, etc.; preparation of SOPs and process manuals; training; implementing IT and supply chain changes; transitional issues, etc.
Even with this preparation, once GST goes live (say on 1), there would be a frantic addressing of go-live issues — GST compliance, systemic glitches, getting transition credits, etc.
This is like a standard three-course meal. But today, one may not have time to finish all courses leisurely. It is like the last five overs in a T20 match, where the aim is to reach the target, come what may.
Let’s take a look at what people are doing in these slog-overs; it may help in choosing some activities ‘a la carte.’ Let us begin with ‘procurement,’ as that is one area that increasingly is getting the attention of companies.
Corporates that are well into GST preparations have long realized that vendors’ compliance with GST is perhaps more important than even their own compliance. Indian GST has a unique structure, which links vendor with customer through GST Network (GSTN), i.e., Government IT backbone: A company only receives credit for taxes paid by the vendor when the vendor files accurate returns on the GSTN. Ensuring a vendor has filed accurate returns is not going to be easy if a company has hundreds of vendors (for direct as well as indirect purchases).
The problem is more acute for smaller vendors, including processors/ job workers, which may not have an IT system to link to the GSTN. This means that the data will not flow from the vendor’s IT system; instead, it will have to be entered again when it’s time to file returns with the GSTN. Since this data entry will be undertaken while filing returns, under a time pressure, human errors will simply multiply.
This, in turn, means that there is a risk of the company losing the credit if vendor data do not match with data the company has in its own IT system. A frantic follow up with vendors to make changes and to remove wrong entries will have to be undertaken. Unless the issue is resolved within two months, there is a possibility of losing the credit altogether. For this to be avoided, vendors need to be trained. They need to be sensitized about the responsibility that is cast upon them by the GSTN.
There are several corporates who, on their own, are organizing training for their vendors, conveying to vendors what is expected of them, and issuing instructions for them to get IT ready (where they are not). Communication with vendors through written and oral means is increasingly becoming important.
Vendor GST readiness score
Where vendors are large in numbers — many manufacturing companies have at least three to four hundred — companies are attempting to have a quick GST readiness score for each vendor. It is like a vendor report card, evaluating them on various parameters like their turnover, IT system, GST knowledge (for employees involved in compliance), tax consultant competence, etc. It may not be possible to drop a vendor merely because he has a low GST readiness score. The only alternative, then, is to help the vendor upgrade his processes and his IT system. It is a collaborative effort between the vendor and his customer.
Companies are also using GST as an opportunity to cut ‘flab’ — to streamline the vendor base. GST will enable a company to have vendors from all over India and not just from its home state. For a multi-location company, it could also mean centralized purchases from a single vendor for some products/services. A more competitive vendor base can be created now.
There is another aspect to vendor rationalization too. Over years, companies have built up a vendor base that includes many vendors who are not registered with tax authorities. This could have been due to various reasons: vendor turnover could have been less than the threshold limit, especially under central excise (where threshold was INR 15 million); or it may not have mattered if the vendor was registered or not, as credit was not available on purchases made from them (e.g., credit of goods procured by an IT company, or services procured by a trading company). GST will allow the seamless flow of credits between goods and services. Since the threshold level is barely INR 1 million, almost all vendors will have to be registered. It therefore makes sense to avoid unregistered vendors and ensure that all vendors are duly registered under GST.
Another rationalization method, which companies are using, is to reduce the total number of vendors. Since vendor compliance is going to decide the credit availability of the company, it makes sense to have fewer vendors for better control. Companies are exploring possibilities of one vendor taking up a few others and then front-ending for them. This is an innovative consolidation model where risks of non-compliance are passed on to the intermediary vendor, thereby reducing the risk for the company: It can now deal with fewer big vendors rather than a larger number of small vendors. GST will open up opportunities for such vendor consolidation.
While all the above steps could reduce vendor non-compliance, the last step always is to build a legal back-up in the contracts. Companies are rewriting contracts to ensure that vendor payments, or at least the tax part, are not released till the Government GST portal does not reflect the credit in Company’s account. This is easier said than done. In the IT system, it is not easy to delink tax from the principal amount in an invoice and separately monitor both. A long relationship with a vendor may also make it difficult to pass on the harsh message of a payment hold-up clause in the contract. However, this is an important control issue which needs to be addressed on priority.
It’s important to appreciate that GST is going to make the whole business ecosystem more interdependent. A collaborative mode is the need of the hour if business and the country are to prosper. Time, of course, is running out fast.
Thanks to Dr. Waman Parkhi, Partner, Indirect Tax, KPMG (in India) for this blog contribution.
For GST readiness of your company and vendors, fill contact us form here: https://www.avalara.com/in/products/gst-returns-filing/
Disclaimer: This blog is made available by Avalara for educational purposes only as well as to give you general information, not to provide specific legal or tax advice. The blog should not be used as a substitute for competent legal or tax advice from a licensed professional in your state or country.