GST Countdown: Why India’s Small Traders Dread The Digital Leap
Traders fear digital compliance for GST will increase their expenses.
For more than four decades, Musharat Manekia has been selling crockery and appliances from his tiny shop in Mumbai’s bustling Crawford Market. But India’s landmark indirect tax reform, a unified Goods and Services Tax, has the 62-year-old worried.
Barely a computer literate, Manekia is concerned about the compliance burden that the new regime brings. “We mostly work through paper bills and our accountant visits for half an hour thrice a week to digitise bills and file returns quarterly. This will change with GST,” he said.
“I would need a full-time accountant and will have to shell out at least Rs 20,000 a month to feed every transaction on the digital database. If I earn a profit of around 14 lakh from my total annual sales of Rs 1.2 crore and have to shell out Rs 2.4 lakh on an accountant, how viable will the business be then?”
Manekia is among hundreds of such traders in Crawford Market, a hub of bulk dealers and retailers of electrical equipment, clothes, toys, dry fruits, cosmetics, bags, shoes and grocery. Across India, there are around 5 crore small and medium-sized businesses providing employment to 11 crore people contributing a third to India’s GDP, according to the 2016-17 annual report of the ministry of small and medium enterprises.
The expectation that everybody will be registered, ready and would be able to adhere to the “onerous compliance requirements is too simplistic”, said Uday Pimprikar, partner-global tax and advisory, EY India. “The government needs to be sensitive to the fact that a person is only as ready as his last link in the entire distribution network. A sensitive implementation of GST is crucial to its success in India,” he said.
Technology Woes
Traders with an annual turnover of more than Rs 20 lakh will have to register with the GST Network (GSTN) – an online portal to file tax returns under the new regime. Real-time tax filing system is expected to replace hand-written receipts, and returns will have to be filed every month compared to once in a quarter, six months or a year now. This, many experts believe, will reduce tax evasion and make businesses transparent and disciplined.
Yet, the ground reality highlights the scale of the challenge. Of the 50 shops that BloombergQuint visited at Crawford Market, only two use a software for electronic book-keeping. Most small traders still maintain paper records, and computer proficiency among them is much lower than the bigger players who can afford tax experts.
Connectivity problems make it worse, especially in rural areas. Less than a fourth of people have internet in rural areas and 90 percent of urban internet users go online just once a month, according to a report jointly published by the Internet and Mobile Association of India and research firm Kantar IMRB in March.
“For small and medium traders, I think the problem is that the compliance that is mandated in the GST regime is technology intensive,” said Pimprikar. And being technology-ready on its own is not adequate as the entire supply chain needs to be equally ready, he said.
Every entity registered under GST will have to file a minimum of 36 returns and invoices must be prepared with specified fields and serial numbers. Digitising transactions, connecting with the GSTN database, training employees or hiring an accountant will add to expenses.
“My staff does not know anything about technology. They are old now and have been with me for more than 25 years. Training them would be difficult. I can’t lay them off like big companies do. Hiring someone new for the job will cost me a lot again. There is really no way out of this,” said Manekia.
Many tax experts disagree, saying these are teething problems and GSTN is user-friendly. “The costs would not be so high, especially for a trader with a turnover above Rs 50 lakh. There will be more transparency in tax compliance going forward once GST becomes a common practice,” said Sachin Menon, partner and head of indirect tax, KPMG. The problem is only in getting them to understand GST and knowing what has to be done, and “only those who have been evading taxes so far are worried”, he said.
Lack Of Guidance
Traders seem to be clueless about the way forward even after registering with GSTN. Balakrishna Dave, a wholesale distributor of garments at Mangaldas Cloth Market in the Crawford Market area, looked surprised when told that invoices will be updated in real time on the portal. He had no idea that bills had to be digitised.
Experts BloombergQuint spoke to agreed that lack of information among traders was a concern.
Details and information about GST are not as exhaustive as they were for excise duty in terms of the material available, said Arun Subramanian, vice-president, globalisation services, SAP India, which provides software and technology solutions to businesses.
Because there are certain open questions that don’t seem to be readily answered, there’s this worry as to what will happen on July 1 – that’s a common trend not just in the MSME sector but also in large enterprises.Arun Subramanian, Vice-President, Globalisation Services, SAP India
Traders admitted that several camps are being organised by traders’ associations, private bodies, GST Suvidha Providers and the Central Board of Excise and Customs for a smoother transition. Such enrollments and awareness camps are aimed at registering traders with GSTN, and providing them details on how to file returns and settle taxes.
Mayur Mehta and Kirit Mehta, who have been running a lighting shop in Crawford Market for 35 years, said such seminars talk more about the benefits of GST instead of providing hands-on guidance on the way ahead.
There have been awareness campaigns in the print and radio as well, but traders do not understand the manner and extent of changes that will be required in a GST scenario, said Saloni Roy, senior director at Deloitte Haskins & Sells. “Considering there are only approximately 40 days for GST to go live, it is imperative for making such category of our economy to be aware and educated of the change.”
Confusion Over Existing Stock
Among the two rules that the GST Council has not cleared is the one regarding transition stock. And it’s a key concern among small traders, especially the process of claiming credit for taxes paid on existing stock once GST is rolled out.
Under GST, traders will have to pay tax on the existing stock before claiming any credit. Input tax credit for state-level levies like the value-added tax (VAT) will be fully carried forward and can be offset against State GST, according to draft rules. In case of central levies like excise and service tax, traders will get full credit if they have excisable invoices – with full details of taxes paid. For non-excisable invoices, traders will get credit of 40 percent of the CGST applicable.
“The 40 percent credit of the output-centered GST liability will only cover, let’s say 3-4 percent of the ad hoc credit embedded in these transition stocks, and is not adequate as the actual amount of tax embedded in these stocks is significantly higher,” Pimprikar said. This limit needs to be increased to at least 75-80 percent and even that in some cases will not be adequate to cover the excise duty paid on transition stock, he said.
Moreover, this tax credit can be claimed only within six months and the existing inventory should be sold within six months of claiming the credit, according to the GST Act.
“It will be practically impossible to clear all inventory within six months to claim tax credits,” Manekia said.