Most of India’s business transactions will soon move through the technology-led GST system. This will change the way firms interact with each other and with the Government.
As close to one crore firms/persons will start using this system soon, it would be useful to understand how a firm will complete a simple business transaction under GST.
Meet Maya and John. They are owners of the two GST-registered firms. Maya produces quality cotton yarn and fabric and supplies these to garment makers such as John.
A business happens
Let’s assume GST is in place. John places an order on Maya for some quantities of cotton yarn and fabric. Maya supplies it on August 2.
Along with the goods, she also sends two tax invoices, one each for yarn and fabric. On this supply, Maya now has to pay GST using the GSTN (Goods and Service Tax Network). GSTN is essentially a single window system for GST.
Maya logs on to GSTN on September 10 and uploads details of supplies made to John using GSTR1 (GST Returns-1). Every registered taxable person has to furnish the details of outward supplies in GSTR-1 by the 10th of the subsequent month in which the supply takes place.
What happens next is interesting. GSTN auto populates a new form (GSTR2A) with the information supplied by Maya through GSTR1 and makes it visible to John.
By showing this information, GSTN cleverly wants John to check if the tax invoices supplied by Maya on August 2 match the details uploaded by Maya on GSTN. If Maya actually supplies more quantity but furnishes details of less at GSTN, she not only evades tax but John gets lesser input credit than due.
To rule out incorrect filing of details by Maya, GSTN allows John to make corrections. Looking at the information contained in the form GSTR-2A, John discovers that Maya has indeed forgotten to include the details of the invoice relating to the supply of yarn.
John is sure as he has a copy of the valid invoice sent by Maya along with the goods. John uploads the information giving details of missing invoice through the form GSTR2 by September 15.
On September 16, GSTN allows (through auto-populated form GSTR1A) Maya to see the details of missing invoices filed by John (through the form GSTR2) on GSTN. GSTN allows Maya two days to verify the missing invoice contents. She is at liberty to accept or reject the changes.
Correction and after
If Maya realises her error, she has to upload the revised information through the form GSTR1. Now GSTN is in possession of information on which both Maya and John agree. GSTN auto-populates form GSTR3A based on the information contained in GSTR 1&2 and allows John and Maya to view this information.
GSTN requires both Maya and John to file monthly return form GSTR3 giving details of inward and outward supplies, input tax credit availed, tax payable and pay tax by September 20.
Maya pays required tax online based on the liability shown in form GSTR3 on September 20. The input tax credit claimed by John in GSTR2 becomes final credit only after the GSTN issues the Form GST ITC-1, which shows matching inward and outward supplies.
But what if Maya rejects John’s suggestion for corrections? This creates a situation where Maya paid less tax but John claimed more input credit on such tax. Here, the GSTN communicates details of mismatch through the form GST ITC-1, giving John and Maya a final opportunity for reconciliation or correction.
If John or Maya still do not agree, by September 30, the tax payable is added to John’s output tax liability for October.
This formally completes one business transaction. Maya and John file annual returns through GSTR9 by December 31 to complete the yearly compliance cycle.
Many returns, but for good
How should small firms get ready for the new system? One they need to master the requirements of online transactions and reconcile to filing of large number of online returns. A normal firm selling only in its home State will be filing three monthly and one annual or a total of 37 online returns. In addition, there are at least four auto populated forms generated every month by GSTN, which needs to be responded in a tight 1-2-day timeline.
Then, there will be additional compliances if buy-sell details do not match. If Maya sells in 10 States, she will need to file 10 times the number of returns. Any wrong filing of return would result in blocking of money and possible loss of business.
Small firms are not tech-savvy and there would never be enough ‘tax return preparers’ within reach to help them. One solution could be to develop online simulation games on return filing and other GST compliance processes.
No amount of classroom training will match the results achieved through simulation games. GST would need to introduce largest handholding exercise, may be combining it with the Skill India programme.
The process may look daunting, but consider this. John or Maya do not have to step out of their home offices or file numerous forms or hire a middleman to make a run to many tax offices.
Or think about the benefits of the invoice-level matching which enables correct payment of taxes and leaves no scope for fraudulent claims, discovered every now and then in the existing system.
Enabling small firms make smooth transition would be critical for success of GST. After all, 90 per cent of GST users will be small firms.