We, the Marwaris of India, traditionally either traders or (Chartered) accountants, are inherent of 'adjustive' nature. We adjust well with native people wherever we settle and we are also good in making book adjustments! It is another matter that due to our book adjustment skills, demonetization was a cat among us Marwari pigeons! Now, the lion called 'GST' has entered our life and our day-to-day conversations.
In fact, increased GST discussions in our social interactions are depriving us of receiving updates on personal lives of our relatives, distant relatives, relatives of distant relatives and furthermore. Now-a-days GST is discussed more at our weddings than bride's jewellery and lengha. Some of us can even be found whispering sorrow about GST during funerals (even before its birth!).
Recently, I got into an interesting GST conversation with my cousins during the wedding of my Mama's daughter. My Mama, who is a CA from Jodhpur and holding a senior position in one of the Birla group of companies hosted this wedding at a five-star hotel in Mumbai. On the wedding eve, my cousins and other relatives were waiting for the sangeet sandhya scheduled, to begin with the performance of internationally acclaimed Langa singers from Jaisalmer. While the Langas were busy tuning their instruments, my cousin Pawan who is an Indore-based distributor of tyres asked me, 'Bhiya, why GST professionals like you say that it will change the way business is carried out in India'?
Before I could answer, Basant, another cousin of mine who runs a textile trading business in Surat, also asked, 'I keep hearing that GST is not just a tax rate change, is this correct'?
'Well, primarily there are two reasons why GST is a grand economic reform and not just a tax change', I said. The ensuing GST discussion caught the attention of few people sitting nearby including Jagdish uncle an NSC card holder, and three-four chairs simultaneously turned towards me for joining the conversation.
'The first reason is the provision for reverse charge', I said and continued to explain why this was important.
'Under the new law, a registered person is required to deposit GST on any procurement of goods or services from an unregistered person'. Pointing towards Pawan, I explained, 'for example, if you purchase tea for Rs. 10 from a hawker and claim it as an expense then in the absence of any tax invoice from the hawker you will need to deposit GST on his behalf.'
Pawan quickly remarked, 'it will be quite burdensome for us to determine all the purchases from unregistered suppliers and deposit GST thereon each month. This also means that no year-end adjustment basis bills from unregistered people would be possible' and curiously looked towards me.
'Correct. With this system change, large businesses will prefer doing business with registered people. Due to reduced business, in the long run, unregistered people would be inclined to take registration and issue proper tax invoices.'
Agreeing with me, Jagdish uncle nodded and to lighten the mood he said, 'we Marwaris can keep the record of sagaan given by guests on our children wedding for generations, so keeping a monthly record of unregistered purchases is not burdensome', making all of us laugh.
He then made an intelligent observation, 'if input tax credit can be claimed for the tax paid on reverse charge then it is merely a procedural issue.'
His comment required an explanation of the concept of indirect tax. I resumed with a smile, 'Jagdish uncle suppose you purchase a Reynolds pen for Rs. 100 from an unregistered seller.
Since the seller must have paid GST upon its purchase, this pen had already suffered the tax liability. Then GST will again be deposited by you in the absence of a tax invoice. This causes double taxation. On the contrary, a registered supplier selling the pen would reduce the GST paid on purchases from the GST collected on the sale. Since the tax is recovered on the value addition, goods purchased from registered dealers are economically cheaper'.
I summarized, 'firstly due to compliance burden and secondly, due to the double taxation of the goods purchased from unregistered dealers, under the new system instead of Government, we all will push unregistered people to take registration and issue tax invoices. This trend will substantially reduce tax evasion in future', and no one seemed to have any doubt in this respect.
By the time I finished, Langas had already tuned their instruments and were now busy checking the microphones. Continuing the discussion Pawan asked, 'and what is the second reason?'
'The second reason is why GST is a major change is 'GST Network' or 'GSTN'. Under GST regime, each business transaction of sale and purchase would need to be reported by taxpayers to GSTN, i.e. the person to whom supplies were made, his registration number, the amount charged, tax applicable etc. Thereupon, GSTN would match sales reported by a seller with the corresponding purchases reported by the buyer. Due to this transparency, avenues for doing tax evasion will come down considerably', I said.
Basant, who was quietly listening to me till now got shocked, and asked, 'Bhiya I purchase goods worth 5 crores and sell them at 8 crores but report only 2 crores purchases and 3 crores sales in my returns. Will it GST impact my kaccha sale of 6 crores in cash?
'Of course. Let me illustrate. If the manufacturers from whom you buy cloth report the sales of 5 crores made to you on GSTN portal then you will be expected to report the corresponding sales for such reported purchases. Manufacturers will report sales made to you accurately because their raw material suppliers will report their own supplies for enabling manufacturers to claim input tax credit of GST paid on raw material', I explained and then made a concluding statement.
'Due to this chain of reporting of purchase-sale transactions on the Government's GSTN the possibility for making out of book sales will be minimal'.
Everyone was silent. Langas were set to begin. After some introspection, Basant very submissively said, 'Bhiya we do tax chori because everyone does it in the market, else we cannot do business. It is good if everyone is compliant. If our books are strong bankers will support us, our business will grow, our investments will be more secure. And most importantly, such a change will be great for the country.'
I could sense the enlightenment.
Langas started singing, on a befitting high note, the song close to hearts of all Marwaris, 'Kesaria baalam…aavoo ni…padharo mhare desh…', thematically inviting GST to our country.
The author is a Managing Partner from Reina Legal