GST readiness: IT strategy guide for businesses
On 1 July, India will become the latest country to implement Goods and Services Tax (GST). However, the country is taking a different approach from most of the other 160 countries that came before it. Like Canada, India will subscribe to a dual GST model, which very few other countries in the world follow.
Hailed as the country's most important tax reform to date, GST India aims to establish uniform taxation and plug most of the loopholes for tax evasion. As such, it is not just a tax reform but a business reform. And, like any reform, it hasn't been without its challenges.
Major difficulties of GST implementation and compliance
In fact, it has taken 17 long, obstacle-ridden years for GST to become a reality in India. It was first introduced in 2000 by then Hon'ble Prime Minister Atal Bihari Vajpayee, and it was first proposed to the Indian parliament in 2006.
Now the country sits on the precipice of GST implementation, but that doesn't necessarily signal that things are about to get easier. The implementation of state VAT laws back in 2005, after all, was far from hassle-free.
Malaysia provides another telling example. Despite the Malaysian government prepping the country for GST for 1.5 years, its implementation in 2015 was met with widespread unrest and even anti-GST protests in Kuala Lumpur. This occurred despite the country having a solid IT infrastructure, good awareness, and more importantly a high exemption threshold.
Indian government may want to brace itself for a similar response. After all, for many Indian businesses, GST represents a significantly larger burden than under the current tax regime. Here's why:
- Dual GST – India's dual GST model imposes both a destination-based Central Goods and Services Tax (CGST) and a destination-based State Goods and Services Tax (SGST) on taxable goods and services, and rates will vary based on customer location. Most taxpayers presently register with either the state governments (for VAT) or with the central government (for service tax), and they charge a uniform tax rate applicable to their business type.
- Increased returns – GST will be implemented in 29 states, seven union territories, and across the nation; 37 different regions in all, each with a different tax rate. Any PAN India company will have to obtain 37 registrations under GST, and even the smallest business will have to file as many as 37 returns annually. That's compared to two half-yearly service tax returns today. And that's assuming the GST returns are without error; corrections will mean additional returns.
- Further complexity – The model GST law recognizes 111 points for taxation, which means Pan India companies will have to comply with GST law at as many as 111 points. Further, GST has a low exemption threshold: Rs. 20 lakhs. Compare this to the excise duty threshold of 1.5 crore, and the number of assessees covered under GST increases dramatically.
- Roadblocks – Assesses will not be allowed to make the next month's compliance until the previous month's compliance is complete. This goes against the nature of small businesses; when it comes to tax compliance they are staunch believers of the principle “Raat Gayi Baat Gayi” i.e. They quickly forget about any incomplete compliance in past.
- Incompatible IT infrastructure – In large part, the entire GST compliance process will happen online. Yet today's business systems need to be modified or replaced to talk to the GST Network (GSTN). This could be an especially cumbersome burden for businesses, whether they are already technically savvy or just now stepping into the digital world.
Given all this, GST implementation may not be so easy after all — especially from a technology standpoint.
IT infrastructure for GST
The importance of being GST ready can't be overstated. A primary area where businesses need to enact change to ensure a smooth transition is in their IT infrastructure. Every taxpayer and tax professional, even those in the remotest parts of India, will have to be IT educated to effectively establish and maintain compliance.
Otherwise, non-compliance will not only lead to punishing penalties under the law, but will also seriously affect business operations and relations. In fact, every taxpayer will be rated according to their GST compliance, with the ratings posted publicly online. Naturally, a lower GST rating could bring about negative consequences, such as loss of business — potentially in a very short period of time.
Many medium-sized companies in India continue to use old systems that will pose numerous problems in the transition to GST. As Shashank Dixit, CEO, Deskera — a business software provider in the Asia-Pacific region — said, “The transition may be difficult for companies using older 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 anymore. In such a case, it willÂ be difficult to adapt the software to the changing times for moving beyond excise and VAT to GST. Such enterprises will have to go for new vendors, who have the technology to deal with the GST.”
The first step toward compliance for CFOs will be to decide whether to upgrade their existing systems (if possible) or to implement a new one. Either option would introduce a risk of data migration loss and the need for extensive employee training.
As EY Tax Partner Vivek Paschia said, “It is learnt that many big businesses have either failed or struggled to achieve IT transformation for having not planned or started early. It would be a mistake to assume that IT software with GST capability from other countries may be adopted wholesale in India, due to peculiarities embedded in the proposed Indian dual GST model.”
It is important to keep in mind that GST is a tax on transactions, which will be voluminous for most of the organizations. GST automation will have to be embedded into the business systems to handle the volume.
The next step toward compliance would be two-fold. One, decide whether to adopt a single company-wide system for accounting, payroll, and GST, or to use a different platform for GST compliance. And two, decide whether to outsource GST compliance to a third-party GST service provider or to implement the in-house technology. The former, known as Application Service Providers (ASPs), may offer a richer user interface and more options for customization.
No matter the route companies take, their GST solution must communicate seamlessly with all GST vendors and with GST Suvidha Providers (GSPs).
GST Suvidha Providers (GSPs)
- Create a bridge between the GSTN and the taxpayer
- Receive processed data from the customer via an ASP
- Facilitate returns filing and other online aspects of GST compliance
- May also act as an ASP
Presently GSTN has named 34 GSPs, and there are hundreds of ASPs.
- Alankit Limited
- Bodhtree Consulting Ltd.
- Botree Software International Pvt. Ltd.
- Central Depository Services (India) Ltd.
- Computer Age Management Services Pvt. Ltd.
- Cygnet Infotech Pvt. Ltd.
- Deloitte Touche Tohmatsu India LLP
- Ernst & Young LLP
- Excellon Software Pvt. Ltd.
- Gofrugal Technologies Pvt. Ltd.
- Hazel Mercantile Ltd.
- Iris Business Services Ltd.
- Karvy Data Management Services Ltd.
- Mastek Ltd.
- Masters India Private Ltd.
- MothersonSumi infotech & Designs Ltd.
- NSDL e-Governance Infrastructure Ltd.
- Ramco Systems Ltd.
- Reliance Corporate IT Park Ltd.
- Seshaasai Business Forms Private Ltd.
- Shalibhadra Finance Ltd.
- SISL Infotech Pvt. Ltd.
- Skill Lotto Solutions Pvt. Ltd.
- Spice Digital Ltd.
- Sugal & Damani Utility Services Pvt. Ltd.
- Tally Solutions Private Ltd.
- TATA consultancy services Ltd.
- Taxmann Publication Pvt. Ltd.
- Tera Software Ltd.
- Trust Systems & Software (I) Pvt. Ltd.
- Vayana Private Ltd.
- Velocis Systems Pvt. Ltd.
- Vertex Customer Management India Pvt. Ltd.
- WeP Solutions Ltd.
ASP services: Preparing business systems for GST
Once a broad decision regarding the IT ecology is reached, a business will need to consider:
- Software versions and updates
- Tax Masters
- Transitional period
Software versions and updates
First things first, businesses need to verify which software versions they presently use. This will help determine whether a GST-compliant update is available for their current system.
Many software companies have announced that GST updates will only be available for a particular version. For example, Tally has announced its GST update will only be available for Tally ERP 9 Release 5.5 and above.
Similarly, SAP has released the minimum support pack level of software required for GST transformation.
Updating current software in order to move forward with GST will, of course, require much less effort and expense than implementing a whole new system. But, if a business is already running on old software, it may have no other choice but to take the more drastic measure of implementing a new system.
The chart of accounts is another area where change will need to occur. Output and input IGST, CGST, and SGST accounts will have to be created. PAN India organizations will need to create accounts in each state and for each GST registration number, making sure each account is set up to correctly claim input credit against the respective output liability.
Vendor and customer registrations will also need to be amended to capture GST numbers and locations, as well as the location of the company unit with which they are dealing.
Tax masters will need to be amended for rates. And, along with delivery masters, they will require an update to record the place of delivery origination and destination. A link between the delivery masters and tax masters will be needed to update the tax rate as applicable in each scenario.
Updates to the item masters/service masters will be needed to capture the respective HSN code, SAC code, and the applicable tax rates.
Two types of invoices will be issued under GST:
- Bill of supply – issued in the case of composition dealers or exempt goods
- Tax invoice – issued by registered dealers claiming input credit to the purchaser; invoices will need to be prepared differently for supply of goods vs. supply of services
Transactions: Input Tax Credit
Another concern is Input Tax Credit (ITC). Under excise duty and service tax, ITC was always handled on a self-assessment basis. Questions were only raised during an audit. Under VAT, only a few states introduced invoice matching, but the disallowance, if any, took at least two to three years.
This will change radically under GST, which establishes ITC matching on a monthly basis. Any mismatch in the ITC, and the GST liability shall be borne by the purchaser. The IT infrastructure will have to be seamless enough to absorb these mismatch reports into its system and make follow-ups with the non-compliant GST vendors. Any glitch in the system could result in a huge tax loss for purchasers.
Presently in the case of excise and service tax, ITC is only available for those goods/services that fall under the definition of input. Whereas with VAT, credit is not available for excise and service. This too will change under GST. Restrictions will have to be placed in the system for appropriate ITC calculation as per the law.
Monthly reports will have to be generated and filed for each state. The data and format of these reports may vary per the ASP/GSP the organization uses. If there’s a mismatch of ITC, reconciliation reports will also need to be filed.
In fact, businesses need to prepare their systems for live ITC reconciliation with every vendor, as well as the reconciliation of their cash ledgers with their books of accounts.
MIS and other reports will also undergo a lot of change under GST.
Once GST goes into effect, businesses will need to address the following to comply with the new tax regime:
- Stock in hand
- Goods in transit
- Goods sent on an approval basis – goods delivered/received but not yet invoiced
- ITC of the existing taxes
- Open sales and purchase orders
This transition period will undoubtedly be a headache for businesses as they get up and running with GST, making the need for an effective and reliable IT infrastructure all the more vital.
Software changes will not be limited to accounting and finance. They will affect other business processes like pricing of products and services, supply chain, purchase orders, inter-branch transfers, etc. As such, GST is drawing criticism for the difficult onus it places on businesses to achieve compliance.
Abhishek Gurjar, Manager Data Quality, HSBC Bank Bangalore, speaking from his past experience while working as a consultant for various multi-national companies to oversee the implementation of SAP systems, said, “The taxation in SAP FICO (Financial Accounting Controlling) were a nightmare for the IT professionals as the software [was] required to have a provision for 19 different taxes and that too different for every state! There were immense permutation and combination for taxes, which were required to enter into the system. If not entered properly, it would have a big compliance and regulatory risk.”
Bharat Goenka, Managing Director, Tally Solutions, wrote in an open letter that, “… GST has the potential to destabilize all that is good. … The most critical cause of failure of GST will be in the transference of responsibility and liability of tax remittance to the customers of a supplier. Basically, the law postulates that if a particular supplier has failed to comply with the law correctly by furnishing the correct returns and/or making the correct payment then its customers cannot avail the input credit, and if given, it will be reversed.”
The problem, Goenka feels is not the “management of a manifest risk”, but the side effects of cash flow, improper accounting, and reduced ability for people to trade with new suppliers and new customers since there is uncertainty about the business outcome.
As a modern age reform, GST aims to make the entire tax process seamless and to minimize the role of government departments in tax collection — all with the help of technology. However, obstacles are expected in the initial stages of GST implementation, particularly in regards to IT infrastructure, taxpayer education, and business partner communication.
With GST less than three months away, now is the time for businesses to invest in their IT environments and employee/stakeholder awareness to help ease the transition. Any missteps now, especially regarding IT infrastructure, could lead to costly corrections later. Proceeding quickly but carefully is imperative.
This whitepaper is authored by CA Ami Dhabalia.
Avalara India is offering all corporates and consultants a fully automated GST compliance solution in the cloud for your returns preparation and filing needs. We are an Application Service Provider (ASP) partner with licensed GST Suvidha Provider (GSP). To learn more about Avalara's TrustFile GST offering, please visit http://avalara.com/in/products/gst-returns-filing/