The Goods and Services Tax (GST) is all set to become a reality by April 2017. The new law will set into motion immutable tax reforms, signaling a paradigmatic change in the Indian taxation system. It will affect every one: from an entrepreneur to a bureaucrat to an industrialist to a person on the street.
One of the segments that will bear the full impact is startups. India is already witnessing a boom in startups. According to a recent Nasscom report, the number of Indian startups is the third highest globally (3,100); the number is expected to increase to 11,500 by 2020. Of all these startups, more than 85% fail.
Therefore, it is imperative that an enterprise-friendly tax code is in place and that the transition to a new taxation system is as painless as possible. A new tax regime is always tricky.
Moreover, startups are usually vulnerable as they have limited resources for tax compliance and are usually found fumbling as far as taxation regimes go. To be able to survive and be on the right side of law, they will have to know which taxes to pay, how the tariffs apply, the quantum of the taxes and the procedures for calculation.
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The smallest change in the tax chain could upset their applecart. A small mistake could get magnified and lead to a fat tax bill, much to the detriment of a business just starting out.
However, if planned properly and with appropriate tools in place, startups and enterprises could apply for eligible deductions and file proper tax returns and still end up benefiting and saving on taxes. Therefore, startups must study the GST and prepare for the transition. To do that, enterprises will have to ensure that their tax accounting software is amenable to the GST.
How ERP Software Can Help Startups With Their Tax Compliance Under GST
With the coming of the GST, a great number of modifications will need to be made in enterprise resource planning (ERP) software for tax compliance since the GST would affect the manufacture, sale and consumption of goods and services throughout India. The single tax, which would replace all state-administered taxes such as Excise, VAT, Octroi, and Service Tax, will also have the provisions of the input tax credit method (in which taxes paid in other states can be claimed).
Keeping in mind these factors, multiple modules will have to be created such as those for input credit, destination system, twin rates, exclusion, and other factors in the GST.
This could be a great opportunity for startups and enterprises who are not using the ERP currently but want to upgrade. There is no time like the present. But businesses using older models will have to start looking for either updated versions or new vendors so their accounting is GST-compliant. Whichever software a company uses for its accounting needs, it has to be tax compliant.
Therefore, apart from training their employees, working afresh on their invoices and meeting new compliance regulations, companies will have to modify their ERP to generate invoices and payroll too. In many cases, it could amount to developing the tax accounting software from scratch.
“Enterprises will have to start preparing for the GST. The transition may be difficult for companies using older systems, particularly, if companies that provided them with the software in the first place have shut down and they do not have the codes for development anymore. In such a case, it will be difficult to adapt the software to the changing times for moving beyond Excise and VAT to GST. Such enterprises will have to go for new vendors, who have the technology to deal with the GST,” said Shashank Dixit, CEO, Deskera—a business software provider in the Asia-Pacific region and which claims its ERP to be GST-ready.
Several big players such as SAP, Deskera, Oracle, Tally, etc. have started working towards making their systems compliant with the new tax structure. Some of them even claim to have GST-ready software already in place. The adaptability of ERP to GST will define market leaders in the business software segment.
“We have been functioning in GST-complaint countries such as Singapore and Malaysia. We know it thoroughly. Therefore, our software is GST ready and we can help Indian enterprises make this transition painlessly. Our software will certainly support the new compliance requirements,” claimed Dixit.
Although contentious issues with the GST such as the definition of supply, supply chain management through warehouse engineering, credit allowance during the transition phase, classification of goods and services under the new tax law, etc. remain, they should get sorted as soon as possible. There is no need to wait for April 2017.
As far as startups are concerned the law could reduce transportation cycle times, enhance supply chain decisions, lead to consolidation of warehouses, etc.—which could be good for startups and small enterprises. However, a completely synchronised ERP accounting system will be required to support inventory supply management as required under the GST regime.
Although technology can make the transition to GST less painless for enterprises, big or small, they will have to bear the economic burden of changing from one tax system to the other.