5 Steps for SMEs to prepare for GST

The stage is now set for GST roll  out on July 1, 2017 with consensus in the GST council on the contentious issue of sharing of administrative powers between the Centre and States. This comes as a relief to the Centre after concerns that the demonetisation announcement may cause states to put up their price and derail this most sweeping reform since independence that has a deadline to be in place by September 2017.

The GST Bill will have to be cleared by the GST council in its next meeting on February 18 after which it will be presented in the Parliament in the second half of the Budget session starting March 9. All rules need to be framed and announced latest by March 31. Further the council needs to finalise the classification of products and services and rates (5%, 12%, 18%, 28%).

 This gives just 90 days for SMEs to prepare and be ready to go live by July 1, 2017. 

The primary intent of GST is to expand the base of indirect tax payers by covering most transactions and not to increase the overall tax outlay of businesses.

A major implication from a business standpoint for SMEs would be, creation of a level playing field by having a low threshold which should de-motivate larger organizations from tax evasion practices like having multiple entities. This could also put pressure on SMEs who would no longer be able to avail excise duty exemptions but will have full GST impact thereby increasing competition from larger organizations.

According to CA Ashok Batra, there are three areas that SMEs need to be aware of while moving into the GST regime –

1. Stock status as on the last date that will determine the credit for VAT and Excise which can be claimed for discharge of GST liability. The challenge here could be that many SMEs may not be maintaining stock registers.
2. Migration to GST that will necessitate changes in business processes. For instance, physical location of central warehouse and the timing for transferring goods across multiple states.
3. Necessary changes in the accounting system to reflect requirements of the GST regime. Will existing accounting and ERP software companies be ready to deliver within the timeline?

CA Kamal Aggarwal, outlines several implications for SMEs and tax consultants and steps to be taken to streamline implementation and administration:

• SMEs have limited knowledge of the law with many of them functioning on the basis of hearsay. The consultants they use also have limited capabilities given that most of them have either knowledge of VAT, Excise or Service Tax and rarely a combination of them

• Training for central and state departments who will be regulating, enforcing and assessing. Given the recent announcement that 90% of the tax payers with revenue less than Rs 1.5 crore will be administered for scrutiny and audit purpose by the States and likewise 50% of those with revenue in excess of Rs 1.5 crore, the accelerated knowledge dissemination will be a significant challenge for those empowered to administer. Everyone will have to unlearn the old law while onboarding GST

There are serious cash flow implications for SMEs given issues of getting credit from suppliers. GST will be technology driven given digital invoicing and therefore unchartered territory for several small businesses

SMEs needs to take the following urgent steps:

1. Understand the GST model law and track changes in the Bill and Rules. It is important for the owners and key business heads in the SME to get involved and understand the implications
2. Hire a good tax consultant to advise around the current implications and migration of processes to optimize tax implications in the new regime
3. Implement an accounting or ERP system that is compliant with the GST regime
4. Be cognizant of the steps to be taken prior to moving over. Eg: VAT & Excise credit for stocks
5. Be prepared to operate in a more competitive environment as tax protectionism and other practices will no longer be relevant making small and large companies compete on the same field.

This will ensure smooth transition towards GST which is expected to drive several benefits for the economy including, incremental GDP growth of 1%, improvement in export competitiveness by 5%, increased FDI owing to transparency in indirect taxes and common market advantages across the country