GST Countdown: ‘We Are At The Mercy Of GSTN’
GST Countdown: In the run up to July 1, businesses are renegotiating vendor contracts and adding penalty clauses.
Think of the Goods and Services Tax Network (GSTN) as a post box, GST Suvidha Providers as postmen and Application Service Providers as the people writing the letters. For the taxpayers of course.
Neeraj Athalye, head of the GST adoption drive at SAP India used this analogy to explain the technology framework of the Goods and Services Tax (GST) regime, on BloombergQuint’s special series, GST Countdown.
But the ‘postal’ service is not working as smoothly as it ought to. Athalye said while ASPs have created technology solutions, the changing GST rules and lack of details from GSTN is an ongoing challenge. This flux will impact small businesses the most, he added.
Here are edited excerpts from the conversation.
We are 28 days away from the July 1 deadline. Are the postbox, postmen and letter writers ready?
July 1 clearly is an important deadline for all of us in India, whether it’s large businesses or small. In terms of readiness, I think we are in different stages, depending on which part of the ecosystem we belong to.
I think if you look at the top 100 companies in India, a lot of them started work on GST a while back. Some have been a little ahead of the curve in terms of getting ready from both process as well as technology standpoint. Many others are still in the process of getting ready. Again, GST has a different flavor for different industries depending on whether I’m a telecom company or a utility, an oil & gas or a chemical company, a pharmaceutical or a retail company – there are different flavours of GST and the impact of GST on the overall organisation definitely varies a lot.
In terms of the impact, I would say it is the tier II organisations where I would see a slightly deeper impact. So, if I’m an organisation who has 10,000 suppliers, 30 percent of my ability to become GST compliant is within the four walls of my organisation and 70 percent is outside my organisation in my suppliers. So, if my suppliers who are providing me products and services are GST compliant, I can call myself GST compliant. It’s all a networked economy this time around.
You work with a lot of SMEs (small and medium enterprises). While you said that probably the top-100 companies are ready, it’s the smaller or the medium-sized ones that may struggle with technology and the transition. What kind of interactions have you had with that level of companies?
Large organisations have the ability to understand the impact of GST on them. SMEs will learn about this impact, (only) when they get into it. Now this impact is typically broken into five different areas. The first is the sales-facing or the customer-facing processes.
Obviously, if I’m supplying to a large automated company or a large pharma company, my customers are expecting me to be GST compliant. If I’m not, I am losing business outright. If I’m a sales guy working in an SME, by now I would’ve already been called by a large OEM and would’ve had to drop my prices anywhere from 4 percent to 11 percent. My customers need me to drop my prices for GST.
So, first, on the customer-facing processes, apart from this reduced price point in the already negotiated orders, my next big challenge is the contract. So, an SME has to actually modify or will be forced to modify a lot of their customer-facing contract. The language is changing. The terms and conditions are changing. In some places, customers are even putting in penalty clauses that if you, as a vendor, don’t pay your taxes on time, I’m going to cut 2 percent of your overall payables. Or I will pay you that portion of your product or services revenue, which is equivalent to the tax that you are supposed to pay. Hence there is a straight impact on cash flow, on the bottomline and more importantly the contracts.
Also, my whole forecasting is changing. Forecasting essentially was looking at a six- month horizon- manufacturing and building up stock, placing the stock in a warehouse or pushing the stock to a dealer distributor who then in turn is passing it on to the market. Now this whole process of dump and sell, or stock and sell, is now going to be under pressure post GST.
Now you move onto the second area: the vendor-facing processes. So, I’m an SME. I had to drop my prices by 4 percent. I had to change my customer- facing contract. Now, what I have to do is look back at my vendors and say- my customers have asked me to reduce my prices by 4 percent. Now you, who are my vendor, better reduce it by another four percent or 10 percent. Depending on what I am buying from my suppliers, I have to sit and do a mass re-negotiation with all my vendors.
The third pillar is finance, which is where invoice reconciliation comes into play. Say, if I have sold Rs 100 worth of product, and I am supposed to pay Rs 10 tax on that, then that’s my first payable. Now, if I have purchased material worth Rs 50 from five suppliers, and they, in turn, have paid Rs 5 tax in total already, then the Rs 10 I am supposed to pay, minus the Rs 5 my vendors have paid, is equal to the Rs 5 that I am supposed to pay, or that is total tax payable. Now I have to repeatedly do this process on the 10th of the month, 15th of the month and the 25th of the month. So on the 10th of the month I have to calculate how much am I supposed to pay. On 15th, I calculate how much my vendors already paid, on 25th I tell the government this is what I am going to pay.
As a SME business, so far, I provided yearly details and filed my returns. Now, it’s going to be monthly. I have no option but to do a clean business. I cannot take tax credit of a tax paid by my vendor, if he has not been paying his taxes on time, and if he is not doing a clean business. So it’s a completely networked process.Right from the guy who makes rubber to the guy who makes tyres to the guy who makes cars to the guy who’s selling the cars - all this chain is now going to be linked. And the next guy is responsible for ensuring that the previous guy is tax compliant. Otherwise, he ends up paying more money to the government.
Businesses will also be rated based on tax compliance and that rating will be available on the GSTN website. How will that change market dyamics?
What we understand is that the GSTN organisation is also going to give some sort of a rating to all the taxpayers who are paying taxes on time. So again, just to simplify things, a vendor or an organisation who is paying his taxes on time in full, gets a full five-star rating. Somebody who is paying it irregularly, maybe, gets a three-star rating. So this form of vendor rating is going to impact the ability of an organisation to go out and get business from. If I want to go out there and do business with a large number of cement companies , they will first look at what is my rating as a vendor- if I am five-star rated, it means I am paying my taxes on time. Hence, they will be keen to do business with me. It’s that simple and it’s that impactful.
ASPs like yours are gearing up to providing solutions to companies . How should I pick an ASP? Are you creating sector-specific solutions or are your solutions sector agnostic?
This whole process of becoming GST compliant has two parts to it.
One is becoming GST ready, which means having an ERP (enterprise resource planning) system; not an accounting system. An ERP system should be capable of handling GST-specific processes on the sale side, on the procurement side, finance side, on the supply chain side, on the manufacturing side, so on and so forth.
The second part is becoming GST compliant i.e. filing tax returns on time in full.
So, what are the key aspects of selecting an ASP?
First, it should be fully integrated with your ERP to be able to pull sales, procurement invoices, do the churning, realign the data, push the data to the GSN, get information back and reconcile. So an ability to seamlessly integrate on one side with the ERP and on the other side with GSTN through any GSP. We are 100 percent GSP agnostic, i.e. you can drop your letters in any post box and we will be able to integrate with any of them.
The third important feature is audit trail. It has to do with the ability to file, say 15,0000 invoices every month, get back a signal saying, yes, all have been accepted and maybe three years down the line, pick any invoice and see what has happened to that invoice. If I have to do that, I need a GST-ready and a GST-compliant ASP to get fully integrated.
What is happening at SAP India’s GST war room? What are the challenges that you are facing?
The moment a GST related law is announced, released, changed or modified, we must go back to the ERP, make some changes and roll out that patch to all our customers who are using the ERP so that they can become GST ready.
Recently, for example some contracting related rules have changed. Something like sub-contracting impacts pretty much every manufacturing organisation in the country. It’s a two-step process: to understand a law and to convert it into a piece of code in the ERP, and insert this code wherever changes need to be done and that takes time.
For the ASPs, what is important for us is to integrate with GSTN through the GSP. Now GSTN, in the process of getting ready with all the details, features, Application Program Interface (API) etc, will pass on the details to us. We will then have to modify our ASP to meet API requirements. So, that process is still on. We should have been there with the help of GSTN, we are at the mercy of GSTN to give us all the APIs for us to become GST ready with ASP application. We are trying our best.
