How SMEs and Industries can maximize benefits under GST: Goods and Services Tax (GST), has been introduced in the country effective from 1st July, 2017 on an all India basis and we have just two months practical experience. Small and Medium Enterprises (SMEs) are the ones most directly impacted by GST implementation. Its impact is constructive as well as unfavorable in a few cases. It will bring with itself a sea change in the way we file taxes, and also how we conduct business. Many have called it a ā€˜behavioural changeā€™ more than a tax change because its successful implementation depends largely on how quickly businesses adapt to the digital format of taxation.

In the background of the above, let us see how the SMEs are expected to leverage the benefits of GST to be a cost competitive industry;

How SMEs and Industries can maximize benefits under GST

1. Compulsory Registration under GST:

It is advised that the SMEs should opt for regular registration even when the total value of supply in a year is less than threshold limit ( Normal Dealer- 20 Lacs- Composition dealer- Rs. 75 lacs) . This will allow the industry to get full input tax credit on its capital goods, raw materials and services failing which all these taxes will be part of its cost.

2. Become a reliable and responsible Vendor to the Customer as a registered (GST) Vendor :

In a GST regime most of the registered manufacturers (small or big) will always opt to source its inputs (both goods or services) from the registered vendors only to avoid payment of tax under Reverse Charge Mechanism. Further, the cost of product of an unregistered vendor (including Composition Dealer) will always be higher than a registered Vendor by at least 18-20% because of nonavailability of input tax credit as explained in (1) above. Many big industries have already taken a corporate decision to completely stop buying materials from un registered dealers.

3. Multiple units/branches/Depots in a State with single compliance:

Unlike previous system, there is a single compliance for all units located in one state. In other words, GST believes one state, one compliance concept. Hence, if you have multiple branches, show rooms etc, you will always go for a single compliance. Hence, you may go for multiple show rooms, godowns etc. without having the liability to have multiple compliance obligations in a state.

4. Reduction of Input cost at least by 2-3% ā€“

Under GST, full input tax credit will be available on all inter state purchases of goods and services which were not available under the previous tax system. Further concept of Entry tax and Octroi payment are now in the history. Furthermore, tax on almost all services for business purpose will be available as credit unlike previous system. These themselves would help to reduce input cost by at least 2-3%. The industry in West Bengal will be mostly benefitted since most of the units in the state source at least 80-90% of its inputs on inter state basis i.e. from other states. Other than Coal, Tea and Jute, there are no other major raw materials available in the state.


5. Go for complete revamping of supply chain management including Godowns, C&F Agents, Branches:

Under previous tax system the Corporates were required to maintain local branches, depots , godowns at various places and more particularly nearer to its customer for better tax management and to meet the requirement of its customer. For example under previous tax regime, a Customer Y at Delhi would not ordinarily be inclined to purchase material directly from Xā€™s manufacturing unit at West Bengal. He would rather advise X to open a Branch at Delhi and to supply the material from its Delhi Branch. This would help him (Y) to avoid making payment of CST which was not available as input tax credit under previous tax regime.

Now under GST regime, full credit is available on inter state supplies of goods and services. Hence, now customer will have no issue to buy materials directly from the manufacturer from any of its points. Therefore, a close review is now necessary to find out whether there is any need to have such branches apart from customerā€™s specific requirement. One branch means additional cost of personnel, real estate, stock loss, high inventory, pilferage, security cost, borrowing cost, nonmoving stock IT system etc. Go for centralised Godown facility at strategic centres to service all India customers.

6. Do strict re-negotiations with the Suppliers of raw materials:

in respect of orders/contracts already awarded This is a very important and critical job for all manufacturers to re-negotiate prices of all contracts already awarded to the Vendors towards passing of GST benefits. As per the Anti profiteering provision in the GST law, the dealers are supposed to pass on the GST Benefit to the customers. Hence, a cost analysis may be necessary to ascertain the cost of product for the pre-GST and post GST period . Probably a cost accountant may be helpful to derive the Pre- GST and Post-Gost cost and then to re-negotiate the price with the Vendors.

7. Re-negotiation of Transportation charges for all incoming and outgoing carriages In view of the withdrawal of Check post, Entry tax, Octroi and introduction of E-Way bill, the transporters are expected to reduce their time period for carrying goods to different destinations. Previously, a truck used to run approx 250 kms/day in our country ( against 500- 800 Km/day in a developed country). Under GST regime, it is expected that Trucks run at least 400 Km/day and thereby to reduce time period by at least 30%. This saving should be translated in the reduction of transportation cost. The corporate should now watch what is the time period being taken by the Trucks to reach its products to its various destinations and to compare the same with the previous history. This analysis will help to do better negotiation with the Transporter. Further under new system, the cost of detention and demurrage should reduce drastically.

8. Advise GTA to go for compulsory registration under GSTN :

Under GST Law, the GTA has the option to charge Transportation charges without charging any GST under forward tax but at the same time it cant avail any input tax credit. However, in such case, the service receiver is to pay GST under RCM @ 5%. However, although the service receiver gets RCM credit, there will be a reasonable amount of financial loss if they go with this system and rather advise its GTA to take registration under GST and charge forward tax @ 12% to service receiver. This is because of the reason, that if GTA goes with tax exemption ( i.e. tax under RCM), they can not get any GST credit in respect of its inputs like Trucks, Tyre , Spares , mobiles etc. etc. and these taxes will be a part of its overall cost which will be included in the form Transportation Charges. On the other hand if they go for forward charge, they can get credit in respect of its all inputs under GST and would be in a position to reduce its transportation cost to a great extent. Forward tax will not be an additional cost to the service receiver, since it will get full credit. Hence, it will be a win win situation if the GTA charges tax under Forward cover.

9. Go for Complete centralized compliance system

The GST system is run through IT system including its compliances. Under previous system, the companies were required to maintain local compliance centres in view of local compliance under VAT, CST, Excise, Service, etc. Further collection of C Forms, local Assessments etc were required. Under GST system, compliances of all units located in various states may be done sitting from one place . This will help to strengthen the compliance team and to maintain standard policy towards compliance. It is also a cost friendly exercise.

10. Verification of Rate Tax with correct HSN Code

The rate of Tax under GST is linked with products having its own HSN Code. Therefore, correct classification of HSN code of both its inputs and outputs is necessary to determine the correct rate of tax. Any wrong classification particularly of outputs may give rise for payment of differential tax at a later stage.

11. Providing GSTN to all the service providers /suppliers of goods

Almost tax on all inputs of goods and services required for furtherance of business is available as credit. Therefore, the supplier must have the GSTN of the customer/user of services so that they can mention the GSTN of the customer in their Tax Invoice which would help the customer to get the credit automatically . Therefore, GSTN to be provided in advance to mainly all major service providers like Hotel, Advertisement Agency, Travel Agent, Airlines, Banks, etc.

12. Hotel booking through Local Branches/Depots/Unit by providing local GSTN

As per place of service rule, Hotels/Restaurants etc. would always charge local SGST and CGST in the Hotel Bill. However, if the outstation boarder does not provide the local GSTN of its local office to the Hotel company, the credit will not be available. For example, a marketing Manager of Kolkata visits its clients or office located at Delhi and stays at a Delhi Hotel. The Hotel company will raise Delhi SGST and CGST. Such credit will not be available in West Bengal but would be available at their Delhi office, if any. Hence, GSTN of the local office, if any to be provided to the Hotel Company in advance for the purpose of raising Hotel Bill. However, if there is no local office with GSTN, such credit is likely to be lost and it will be a cost to the company.

13. Continuous training to the employees and also Vendors (mostly SMEs)

GST laws are dynamic and it is fast changing. Further, it is not basically a taxation issue. It takes care of the operation, logistics, IT, accounts and of course taxation. Hence, periodical training is necessary to the employeesthey should know how company can take the benefits of GST for its operational improvements. They should also train the small vendors and customers so that the entire team can work in seamless manner.

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