Do you run a small business? Tips to file tax under GST
Expert estimates say that only about 50% of the sector is technologically capable of complying with GST rules.
The Micro, Small and Medium Enterprises (SMEs) sector in India has been the primary growth driver in the country for decades. According to the SME Chamber of India, the sector contributes 45 percent of the industrial output, 40% of exports, employs 42 million Indians, and creates an average of one million jobs every year while producing more than 8000 quality products for the Indian and the international markets. It wouldn’t be wrong to say that the implementation of GST will be a big game changer for the sector. GST, in the long term, will bring about many long-lasting changes in the economy such as reduced prices and cost of operations. But the important question now is if the Indian SMEs are prepared for the transition to a new tax regime - a ‘behaviour change’ that will later pave the way we do business as a country.
Expert estimates say that only about 50 percent of the sector is technologically capable of complying with GST rules. Manpower is also a huge concern for the sector, as many businesses do not have dedicated personnel to follow up with vendors and suppliers and ensure timely payments or invoicing. These are some of the teething troubles that the sector will have to face as the new tax regime comes into force. Knowing these problems in detail makes it easier to recommend solutions, and below you will find some expert tips that can help small businesses to get GST-ready before the tax universe in India changes its colours:
Tip 1: Calculate your ITC like your life depends on it
And truth be told, it actually does! It is very important for SMEs to understand the legislations around Input Tax Credit (ITC). The availability of ITC could determine the cost of compliance and the competitiveness of a business in the GST era. The law allows for ITC to be claimed on expenses incurred for ‘furthering of business’ such as marketing expenses, transport costs etc. SMEs can claim ITC across a bucket of expenses by being familiar with the law and thus reduce operation costs and increasing their margins. Besides ITC can impact your working capital, this makes it all the more relevant to make sure there is good compliance.Watch: Filing income tax returns? 10 key points to remember
Tip 2: Keep those invoices and transaction details safe
ITC can be claimed only when the invoices from the seller and the buyer match completely, and also on the supplier’s timely return filing and tax payments. The entire supply chain, therefore, has to be disciplined about invoices and record maintenance, and timely tax filing and payments should become second nature to all SMEs and everyone they deal with.
Once GST goes live businesses will have to furnish all details of a transaction i.e. all the invoices made out to customers will now be matched to invoices received from suppliers, and only when the reconciliation is done will the ITC claim be valid. This should help the authorities track false ITC claims, but it also means that SMEs will have to familiarise themselves with the technological aspects of ITC claims and ensure that the suppliers they deal with are trustworthy and compliant. Any mismatches will be flagged and will have to be accepted and reconciled with both parties.
Tip 3: Anticipate cash troubles early and stay solvent
Since free-flow of ITC depends on several factors, SMEs might face some cash crunches in the interim while the supply chain adjusts to the new regime and falls into position. Cash-strapped businesses may have to increase their borrowing, but it can be completely avoided if SMEs prepare for rainy days in advance and take measures to keep their business solvent during the transition phase.
Tip 4: Do away with manual book-keeping
GST aims to digitise the Indian economy, and the GSTN portal will be the sole online source for uploading invoices and all other GST-related issues. We have seen how important invoice matching is for ITC claims, and errors can be easily made when you transport manual data to the online portal. Instead, it is better to use virtual records and accounts so that data can be transferred easily without any costly mistakes. Some of the SMEs may have to invest in giving basic training to their staff who have been doing manual book keeping and accounting in the past.
Tip 5: Choose your compliance software wisely
You can file tax returns on the GSTN portal directly, but if you are not well-versed with the forms you need to fill and the technical aspects of it, then it would be a better idea to buy a compliance software that lets you file your returns in an easier manner. Compliance software can help you avoid mistakes when filing returns and uploading crucial data. It is important to remember that every business will have to file a minimum of 37 returns in a year (three per month and an annual return), and human errors can prove to be costly in this context.
Hopefully, these tips will help SMEs in India effect a smooth conversion to the new tax regime. The government has been organising GST training sessions and business owners can also attend webinars to understand the finer points of GST. The initial struggle will be harsh on this sector, but once the transition phase is over SMEs can hope for a cost advantage of 2-4 percent due to increased tax efficiency throughout the supply chain. If the sector can only brave the temporary troubles that the change in tax regime will bring and adopt the behavioural changes necessary for compliance, they will be able to reap the benefits of GST pretty soon.The writer is Founder & CEO of ClearTax