Impact of GST on B2B commerce

GST, or Goods and Service Tax, is finally arrived in India. It is termed as the biggest tax reform after Independence. It has the potential to transform the domestic as well as international trade and make it lot more transparent and competitive.

Moreover, a study by the National Council of Applied Economic Research has stated that GST could well boost India’s GDP growth by anywhere between 0.9% to 1.7%.

When implemented, it will boost the growth of B2B commerce market in India in several ways.

1.    Uniform Tax Structure across India: At present, products sold on online sites carries different tax rates for different states which leads to great deal of complexity for online players. In some cases, tax rates are also imposed based on the interpretation of local taxation authorities in different states. This leads to fair amount of confusion and ultimately bad customer experience. However, with the GST, online companies will not have to deal with complicated regulatory structures of each individual state. New law will replace around 17 taxes such as Central VAT (CENVAT), Central Sales Tax (CST), Central Excise Duty, Additional Excise Duty, Special Additional Duty of customs (SAD), Central Surcharges and Cesses, Octroi, State Sales Tax, State VAT. New tax structure is classified into only 4 tax rates such as 5 per cent, 12 per cent, 18 per cent and 28 per cent.

2.    Tax Evasion: Tax evasion by Suppliers can be controlled by Input Tax Credit. This means that the manufacturers or suppliers can reduce the tax on Output if they have already paid the tax on Input. For e.g. if the supplier total output tax(sales) is Rs. 1000 while the tax paid at input(purchase) is Rs. 400. In this case the supplier has to deposit only Rs. 600(Rs. 1000 – Rs. 400) as tax thereby reducing the overall tax at the final product. Credit is available to the supplier only with the possession of correct invoice where supplier must ensure that his (seller) must have paid tax for its purchase. GST intends to provide a fair and level playing ground for all the stakeholders involved in goods or services in the distribution chain. So, the new GST law helps in controlling evasion of tax. This also force non-compliant companies to go out of business. Customer will also buy products from authenticated suppliers with correct bills.  

3.    Logistics – Supply Chain Efficiency: With the new law, logistics becomes easier. Instead of having several warehouses or fulfillment center across the country, companies can have few and strategically located warehouses. Since GST replaces CST, companies will not need to pay the additional tax when dealing with inter-state transactions. This simplifies matters immensely, since now they will not have to worry about which state they are buying the product from. This will also reduce paper work and cut down operating expense. On top of all that, the constant taxing of interstate goods delays their arrival, as time is wasted at tax checkpoints at each state border. The delivery can happen faster.

4.    HSN Code: With the GST implementation, we are moving to the Harmonised System of Nomenclature (HSN) for goods and the Service Accounting Code (SAC) system for services. It is the way of classifying products in different categories, which are internationally recognized. HSN standardizes the classification of merchandise under sections, chapters, headings, and subheadings. This results in a six-digit code for a commodity (two digits each representing the  chapter, heading, and subheading). In the case of imports/exports, HSN codes of eight digits shall be compulsory. This will give precise information about the tax rate of a particular product and hence reduces the error in invoice while billing to the customer with the tax  rates.

5.    Invoice: Invoice template will also go for makeover after GST. It should include details such as such as supplier’s name, shipping and billing address, HSN Code, place of supply, rate etc.. GSTIN of the supplier is mandatorily required in the tax invoice along with a consecutive serial number that is unique for each financial year. Hence, businesses must adopt an invoice format that takes into account the GST requirements.

6.    Better Cash Flows and Working Capital Management: When goods are moved between two different states, a combined tax called the IGST (Integrated GST) will be collected by the central government. This integrated tax amounts is the sum of the SGST and the CGST. For example, if the SGST and CGST are charged at 6% each, then an IGST of 12% will be charged on every interstate trade. Thus businesses do not have to pay CST upfront at state borders thereby freeing some working capital. Additionally with the online GST system, businesses can keep better track of their tax credits during interstate transactions. Alternatively, there is no need to maintain multiple warehouses to ship the goods from. The  company can make the capital cycle efficient by having fewer warehouses based on their demands. Under GST, input tax credit will be dependent on your supplier's compliance i.e. your supplier should file the return declaring the outward supplies along with the tax payment. If your suppliers fail to pay the tax, the input tax credit claimed by you will be reversed and you will be asked to discharge it along with the interest. This will be a blow to your cash flows. Hence companies, which are GST compliant, will have healthy cash flows.

7.    Discipline in Filing Returns: The complete activities related to GST will move to online portal known as GST portal. From registering for the GST to filing returns, everything will be done online. Return filing needs to be done at a regular frequency as directed by the government and thus brings regularity in the system. The new law will be governed by a single tax authority: the GST Council across India and hence compliance and grievances will be handled quickly.

8.    Compliance Procedure: In current situation, companies need to comply with multiple tax structures. They need to maintain separate records for each state and face lot of intervention from state tax authorities at several points. In addition to that, dealing with extra paperwork puts additional burden to the concerned department. Companies, which have, pan India presence finds it difficult and stressful. Their lots of time goes in unproductive work which otherwise can be utilized in more productive and fruitful tasks. With GST, it will be easy to be compliant.

9. Open Market: Level playing field for all. The new tax regime will open the market for all the players in equal potential. State boundaries will not be hindrance in order to do business. This will discourage middlemen in the supply chain. Customer too can purchase products from any manufacturers across the country and enjoy the benefit of same tax structure. Due to GST implementation there is no input tax credit claiming issues against interstate purchase. Thus it makes easy for any players to sell products and increase the business.