GST Challenge For Professionals

Working capital requirement will rise and registration in multiple states would be needed to take benefit of state levy

Professionals and freelancers will probably be the most impacted by the new goods and services Tax (GST). Many would need higher working capital and might need to enrol in multiple states. And, many who have online businesses are wondering whether they come under the ambit of the new tax regime.

“Those who come under GST need to file monthly returns. The bill settlement takes around 60-90 days. For service providers, it can be even longer. It means the professional or the freelancer needs to pay taxes from his pocket first and then wait for payments from his clients,” says Sachin Menon, partner and head, indirect tax at KPMG. Even the rate is higher. Professionals need to pay tax at 18 per cent under GST, compared to 15 per cent earlier.

If professionals and freelancers are raising invoices to those who don’t come under the ambit of GST, the capital requirement is even higher. In such cases, individuals need to pay GST through a method called reverse charge mechanism (RCM). If the client does not have GST registration, the individual needs to raise an invoice to himself and pay the relevant tax. “It may lead to increased borrowing by professionals and freelancers,” says Varun Advani, chief operations officer, MakemyReturns.com. Compliance hassles: Before the implementation of GST, an individual could deduct any business-related expenses such as stationery, office related repairs, and so on, when paying income tax. If you want to get deductions for any such expenditures now, you will need to make purchases or get repairs done from a GSTcompliant shopkeeper or service provider. If they are not compliant, you will need to do an RCM. “This is one of the biggest hassles that professionals and service providers are facing in the GST regime. They will need to block their capital to claim credit for even smaller expenses,” says VS Datey, senior consultant, Taxmann.com. There’s some relief, though. Transactions up to Rs 5,000 a day are exempt from these provisions. An individual, therefore, needs to ensure office-related expenses are below Rs 5,000 a day. Claiming credit can be complex: GST is a destination-based tax. It is levied where goods and services are consumed and will accrue to that state. If the supplier of services and the receiver are in the same state, the transaction is simple. The supplier will deduct Central GST (CGST) plus state GST (SGST), as it is an intrastate transaction. But, if the supplier and receiver are in different states, the supplier needs to deduct integrated IGST. The entire tax goes to the Centre and it will then pass this to the states.

Under GST, professionals and freelancers who have an annual turnover of less than Rs 20 lakh are exempt. But, this is applicable only if the services are provided in the same state. If the services are interstate, the supplier needs to register for GST irrespective of turnover, if he wants to claim credit for the tax paid. “This is an additional burden on those with limited turnover,” says Menon.

Due to bifurcation of the GST tax, professionals and freelancers might not be able to claim credit sometimes, despite paying the tax, if not registered in the particular state. Say, an individual based in Mumbai travels to Bengaluru for meetings. He bears the cost of accommodation. The invoice the hotel generates will be of CGST plus SGST. To claim credit for this tax paid, the professional needs to have a GST registration in the state. Else, he will be able to claim the credit only on the CGST but not on the SGST. “One way out is if the client pays for the accommodation. Else, the person needs to do a separate GST registration in the state to claim credit,” says Suresh Surana, founder, RSM Astute Consulting Group.


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