CA Saurabh Gupta
Both houses of Parliament and many states have given their nod to roll out GST (Goods & Service Tax) in India. So, the stage seems to be almost set for its implementation in coming financial year. Every newspaper, all the addresses by eminent people and social media are exhilarated as well as positive for this new development.
The GST law is already prevailing in many developed countries. India wasn’t an open economy till its liberalisation in 1991. Post this economic liberalisation, economy changed hands from the old aged state run business enterprises to private ownership (both indigenous and foreign) which is popularly termed as ‘Capitalism’. While this Capitalism brought an enormous inflow of foreign investment in country with the said benefits of competitive markets and opportunities of job creations, it also centred the wealth in few hands. Capitalism has always been criticized to favour the riches as it gives the owner of capital more liberties in choosing those avenues of investments, which increases its wealth while. Terms like social welfare, public ownership, wages protection and common man interests often take back seat in capitalist economy. Therefore, it calls for Government to play an active role in setting up the regulations which give fairness and equity to the markets and society at large to ensure no particular section is favoured and everybody gets a fair chance to carry on the trade.
This article aims to analyse the new GST law in light of above responsibility of government for Indian economy. And it tries to seek an answer of a pertinent question ‘Does GST favour large players’?
As we all know the proposed GST law brings a substantial numbers. of compliance issues. To start with it requires every businessman to be registered under the Act. The threshold annual turnover prescribed of Rs 10 lacs (Rs 5 lacs for North eastern state) is on a very lower side, resulting to which almost every businessman needs to comply.
Let us also understand that how does input system work in GST regime. If Supplier “S” supplies goods to Customer “C”, “C” is entitled for input tax provided he uses the goods so purchased in furtherance of his business (he is not an end user but either a manufacturer or trader). Both “S” and “C” needs to file returns under GST Act to complete the chain. There are two options available to “C” for ensuring compliance. In the first option, Customer “C” needs to file his monthly returns in the form of Purchase, Sales and Consolidated return and claim this input. The supplier “S” is also required to file his returns simultaneously. If “S” fails to file his return or do some mistake in tax payment, “C” is deprived of input. Consequently, “C” needs to bear this tax from his pocket.
If we analyse this situation, in first place, a small businessman “C” needs to comply with timely submission of all monthly returns. Even if he is able to manage his back office well to achieve this feat, it is not guaranteed that Supplier “S” will not default. As soon as “S” defaults, “C” needs to fund the tax amount till the default gets rectified. If there is delay in disputed tax payment, the amount needs to be paid along with interest. “C” thus, always needs to have sufficient working capital available to fund this default of “S”. Government has powers to kick you out of business on drop of a hat under the proposed Act. Consider the expected tax rate of 20%, this disputed tax amount can be huge enough to eat up profits of any business. If we notice this from any customer’s point of view, he is always at risk of default made by “S”.
How to mitigate such risks? The first available option is to deal with bigger and reputed suppliers only. It is a well profound belief that ‘bigger is better’. So, in turn, the small market players might end up losing the business even if they are ensuring complete compliance. Does it not affirm the reasoning of being GST favouring large players?
Let’s analyse the second option. The law does provide for composition scheme for businessman as a way out of compliance burden by depositing proposed rate 1-2% of your turnover as tax. In such case, the compliance default of counterparty will not affect you. But this option is only available to businessmen who do not have inter-state business transactions and have turnover lesser than Rs 50 lacs in the year and also the customers of such suppliers aren’t entitled to input credit again. But would someone like to opt for composition scheme? Why not?
So is it suffice to say that opting for composition scheme may not be a preference and small players, consequently they may only end up with substantial compliance cost. On top of that they will always also be exposed of liabilities on account of their suppliers’ errors. This doesn’t leave any other option with a smaller player other than increasing their margins to keep sufficient cushions. This would result in a costly product to customer. And why a customer would prefer a costly product from a small level marketer?
The questions also remain:-
We expect that the proposed law will do away with the draconian and disastrous provisions for the economy’s interest.
(Author is a practicing chartered accountant having qualified post qualification course in “Master in Business Finance” from ICAI. He has over 14 years of experience in finance and accounts domain.)