The Lok Sabha has passed the Goods and Services Tax (GST) bill and the rates for goods and services have been determined, clearing the path for the most significant tax reform in post-independence India.

While GST has been hailed as a much-needed overhaul of the indirect tax system, many small and medium sized businesses (SMBs) across sectors – services and product alike – are wary of its impact on them. It is but natural for there to be teething issues, but once the dust settles down, there will be significant benefits from GST that will fuel the growth of businesses and the Indian economy.

Ease of Doing Business

The primary intent of rolling out GST is to promote ease of doing business. This will be possible through the unified tax system under GST which does away with the multiple taxes that businesses are currently subjected to. In the new tax regime, businesses need to be worried about only one tax, namely GST. There are three types of GST: –

i. SGST or State GST – part of GST collected by states for the movement of goods and services within a state

ii. CGST or Central GST – part of GST collected by the center for the movement of goods and services within a state

iii. IGST or Integrated GST – GST collected by the center when goods and services cross state or national boundaries. States will work with the center to reconcile taxes due to them for such movement of goods and services.

Given the unified structure of GST, businesses will have much higher flexibility in determining where to set up their business and which markets to serve. Movement of goods will be seamless leading to faster turnaround times, lower costs and overall higher velocity of business growth.

GST is a destination based tax system, meaning that the tax will be determined based on where the consumption of goods or services will take place. For technology service providers, this means that customers will be billed or taxed based on the destination at which their service has been consumed. Businesses can, therefore, base themselves where they can gain long-term competitive advantage in terms of resources and not be driven merely by short-term benefits of states providing tax breaks.

Lower Taxes

Today, any business providing products and services is subjected to both VAT and Service Tax. This adds to the burden of tax compliance while also increasing cost of doing business in the form of higher taxes. GST does away with the distinction between products and services. This means that tax calculation for such businesses will be much simpler and in many cases lead to lowering of taxes.

GST allows businesses to avail of input tax credits – tax that a business pays on services and goods consumed – when calculating its own tax liability. Let us say an IT firm has a GST liability of Rs 10,000 on the services it has sold. Further, it has paid GST of Rs 2,000 on the goods and services it has consumed. In such a case, it needs to pay only Rs 8,000 as GST to the government, bringing down its tax liability.

GST provides for a unique tax reconciliation mechanism for businesses to reduce their taxes. A business will be able to avail of tax credit only if its supplier has uploaded the corresponding invoice to the GSTN. This will have a cascading benefit for the entire supply chain in terms of improved transparency and lower taxes.

Digitization and Business Opportunities

Under GST, businesses need to upload their invoices to the GSTN (GST Network) on a regular basis. In addition, businesses need to upload and download various forms from the GSTN thrice a month, every month. This design of GST makes it necessary for businesses to employ technology to run their business and accounting processes.

This ties in well with the government’s efforts to drive digitization in the Indian economy for unlocking efficiencies, compliance and growth. More businesses will come online, creating new business opportunities and a vibrant digital economy. This is great news for technology-based product and service companies as demand for their solutions will increase in a GST enabled economy.

Compliance and Higher Operational Efficiencies

Businesses will need to organize themselves better, as compliance requirements under GST are well-defined and require almost real-time compliance. Most businesses will move to increased automation of their accounting processes increasing operational efficiencies. Indian SMBs will now have to ensure that their processes, including accounting and data management are efficiently organized so as to be able to file a compliance report three times a month.

GST will bring with it a complete upheaval of the existing tax system. In the initial phase, industry can expect a period of adjustment. However, once the one-time cost of technology adoption and financial services is absorbed, the prices of products and services will come down, helping small businesses in the long run, while providing newer opportunities for growth.

Source: Economic Times