He said, “The number of people showing income more than Rs 50 lakh in the entire country is only 1.72 lakh. We can contrast this with the fact that in the last five years, more than 1.25 crore cars have been sold, and number of Indian citizens who flew abroad, either for business or tourism, is 2 crore in the year 2015. From all these figures we can conclude that we are largely a tax non-compliant society.”
And the government intends to tackle this by the implementation of the goods and services tax (GST). While draft GST rules on various aspects aim to bring in more transparency; maintaining records of different entities involved in every transaction appears quite tedious. It also means higher cost of compliance.
Apart from that, working capital requirements for manufactures would soar too because both companies and distributors will have to pay GST at the time of dispatch of stock even if supplied to own warehouses, and subsequently claim credit on the input tax so paid. The input tax credit mechanism will entirely be online and real time. Therefore, it would pinch small and medium enterprises (SMEs) the most.
“The way the law is stated today, cost of compliance is not just going to go high; small and medium businesses are going to be in deep trouble. Linkage of input tax credit to payment of supplier tax is very dangerous for the small business community and therefore for a very large part of the economy,” said Tejas Goenka, Executive Director at Tally Solutions.
Also, since uploading of each invoice has to be done on a regular basis, an accountant may have to be designated for this purpose, which small businesses may not be able to afford, added some tax experts.
For smooth transition, a slew of accounting and tax firms have been operating as licensed GST Suvidha Providers. They will help businesses to comply better with GST processes and depending on the kind of product or service for which assistance is required, charges will be levied.
“The charges range from Rs 500-5,000 depending on the kind of service and for small companies incurring such expenditure may hurt their margins. As far as service providers are concerned, decentralized registration will be an additional cost burden for them,” said S.S. Gupta, editor at Taxmann.
According to a recent channel check by Edelweiss Securities Ltd, while large consumer goods companies are GST-ready with IT systems in place, the scenario with other stakeholders, i.e. distributors and wholesalers, is completely different. Many wholesalers are currently outside the tax bracket and a few are improving their margins solely by way of tax evasion, so some pushback is anticipated from their end, said the brokerage house.
But since wholesale constitutes 35-45% of overall trade in India, Edelweiss expects large consumer goods firms to encourage wholesalers to come into the organized sector. “This could push up overall distribution costs of companies, which in our view should not be more than 50-60 basis point and will be a one-time exercise as the same can be easily passed on to consumers,” added the Edelweiss report.
While it remains to be seen to what extent tax evasion reduces in the GST era, compliance cost is sure to rise.
Source: livemint