The whole One India One Tax is a great step for businesses in the country. There is a lot of buzz around it and if we actually look at it, it does take out a lot of anomalies from the system. When the tax gets cascaded down from one level to another, only the value addition gets taxed. So it’s basically the concept of VAT, but when the states and center had their own powers, it was always like a ‘can do anything’ kind of concept. On a few goods or a few services, there were both VAT and service tax being charged. Excise duty benefits were not getting passed on, for example, when you charged excise duty, it became a cost for the vendor, and never passed on to the end customer. What happens now is the GST puts the impetus on supply, and the cascading effect passes on to the customer. I believe it is a wonderful phenomenon for the economy.
But then, the entire GST concept is based on what input credit is passed on. If the chain of credit breaks at any point, that can be a deal breaker. In simple words, if a person takes input credit and does not pass it on to the next person, the entire cost gets added on to it and the next person suffers the consequences.
So if one takes a look at the input tax credit provisions, per say, which the industry is seeing as one of the biggest flaws – When can input tax credit be claimed? Imagine a hypothetical situation where two people are transacting, the first person (let call him A) buys something from a second person we’ll call B, for which B raises an invoice, wherein Rs. 1 Lac is the cost of the material and Rs. 20 thousand is the tax. So A pays B 1lac and 20 thousand rupees. Literally, with the scenario right now, once A has paid the money or B has raised an invoice, A is entitled for a tax credit. Now what the GST laws say is that unless B has paid this tax amount of Rs. 20 thousand to the government, A will not be given the benefit.
We believe that such scenarios will be hampering for business transactions as the trust aspect goes away from the entire system. In our country today, or anywhere else, business is built on personal links and relationships. As the GST laws tell you that unless B pays the taxes, A won’t get the credit, this becomes really tough for doing business. So basically once an organization or business pays the tax, it has to make sure the other entity pays the tax to the government.
Essentially, it can be said that collection and supervision of tax is the government’s responsibility. What the government is doing in this case is that it is basically shedding this responsibility and putting the burden of tax monitoring on the tax payers. I personally agree with and respect the government’s concern that only what is funded can be refunded. But, once two people sign off (transaction has happened), it means that there is tax to be paid to the government. It is then the government’s responsibility to take that money from the person. Making the person responsible for ensuring that the tax is paid and denying a credit as well when another person has not paid the tax is unfair. There can be a number of reasons for a person not paying the tax. If one goes to the line items when input credit can be disallowed, it is not just in payment – If a person has 100 vendors, and if he just falls short of paying the full amount to the government, the entire group of 100 suppliers will be denied their deserved input credit. What Tally, along with other bodies is trying to impress upon the government is, that there are numerous ways to catch hold of a defaulter. The registration process needs to be made robust. The government has a number of identification details of a person (PAN, Aadhar, Voter ID etc.) with the help of which it can catch hold of a defaulter. The government should not deny the credit to other tax payers because of such a defaulter.
In an unlikely scenario, what will happen is that the government will stop trusting the taxpayer, who is the actual hero of GST. If two people are transacting and the government’s tax is being cascaded, it is the government who should come and catch the defaulter. They can make the penalty provisions stricter to keep a check on tax defaulters and ensure that the tax is being paid.
As per recent information, the government is in the pipeline of making a dashboard, which will monitor and record all the defaulters. However, for that kind of analytics, and keeping in mind the vast population to be catered to, such a solution might take another two years. So, for the first two years, there is going to be complete litigation, the entire market might go into a spin as the ease with which transactions are supposed to happen, will not happen.
This will induce mistrust in business, because people will want to check tax records of prospective business partners before transacting with them. The speed at which transactions happen generally, might take a knock back. For the big enterprises with deep pockets, it is not going to be a big problem in most cases. But for MSMEs working on slender margins, this is expected to come across as a big problem, as funding the tax amount as cash flow is a perennial problem with small businesses. All these vulnerabilities have the potential to put an immense stress on the system.
Therefore, Tally suggests that the government puts stronger terms and policies in place to ensure such hurdles do not happen. The best thing about GST is that it is a technology enabled landmark, where everything would be sorted or solved by technology, true to the digital age.