India has a federal system of governance for its 29 states and seven union territories. This has created a complex web of taxes, with every state having its own set of taxes in addition to the ones collected by the central government. For businesses, it can seem more like a continent with different countries. Many advantages of a single, large market are lost, affecting the country’s economic growth too.
We will see even small businesses start using software to manage accounts. It will no longer be a matter of going to the accountant at year-end.
A shift to a single taxation system of GST (goods and services tax) was proposed long ago, but has been stuck in a political quagmire. States have been reluctant to give up their control over sales and other taxes. Negotiation has been especially hard when a state is ruled by an arch-rival of the ruling party at the center.
Finally, a stable central government with a strong mandate in the last election has been able to push legislation for GST through parliament – and July 1 is the date set for its rollout.
Now comes the next mountain to climb: implementation. Businesses stand to gain a lot in the long run, but initially, there is the pain of migration. GST gives a big push to digitized accounts and adoption of tech, without which it will be hard to cope with its requirements.
Here’s where India’s tech startups get into the act.
Today, SaaS pioneer Zoho launched a “GST-ready” cloud-based product called Finance Plus to help businesses manage their taxes under the new system. Several fintech startups, like Razorpay and Cleartax, are helping with the shift to GST. A new #startup, TaxGenie, chosen for the summer batch of Axilor’s accelerator in Bangalore, focuses purely on GST.
Zoho’s Finance Plus suite integrates GST with multiple products it has for invoicing, accounting, expenses, subscriptions, and order management. “It’s not going to be like just using a tax filing software,” explains Zoho’s product management director Sivaramakrishnan Iswaran to Tech in Asia. “The impact of GST will be all over a business, and it will involve a continuous process of tracking and entering data on invoices, orders, expenses, and so on. Besides, GST returns will have to be filed thrice a month, compared to the monthly filing of VAT (value-added tax) and quarterly filing of sales tax at present.”
We have to back up a bit to understand the challenges of implementing GST in India. It took long-drawn-out negotiations as well as intervention of the prime minister, Narendra Modi, to get all the states and rival parties on the same page. “Let bygones be bygones,” said the former prime minister, Manmohan Singh, alluding to the fact that the reform was blocked during his tenure. He then put his weight behind GST. “It could be a game-changer (for India’s GDP) but … there will be pitfalls. We learn as we go along.”
A lot of factors are coming together in India to make businesses move to the cloud. We’ve been seeing traction picking up for our products in India.
Compromises had to be made between the central and state governments. The result is a more complex GST in India. Although it moves to a single taxation system, there are state GST, central GST, and integrated GST components in it to subsume the current plethora of indirect central and state taxes. A country like Australia, in comparison, has a simpler, single GST.
Apart from working through the maze of state, central, and integrated GST, one of the biggest challenges for businesses in India will be to file three GST returns a month. The first one will be for supplier invoices, the next one for bills, and finally a third one for reconciliation. This last bit is particularly dicey.
Under GST, a business can claim tax credit in advance against its supplies. The catch is that it will only be credited if the GST returns filed by the suppliers match the credits claimed – that’s the third part of the monthly GST returns: reconciliation. Over time, businesses will choose reliable suppliers who file their GST returns accurately, but in the short term there will be a lot of tracking and followups. Also, this system requires all invoices to be submitted – the GST backend is equipped to process millions at a time.
Obviously, manual submission of invoices, claiming credits, and filing returns, will quickly become impractical. “So we will see even small businesses start using software to manage accounts. It will no longer be a matter of going to the accountant at year-end,” says Siva, adding a positive note. “This will bring financial discipline which is good for businesses in the long run if they don’t see it as a headache.”
The positives of even a dual or triple GST are many. We may see the long queues of trucks at inter-state toll gates disappearing over time, as the octroi duty on goods entering a state is now a part of GST collected in a centralized filing. They won’t disappear straightaway, however, because truck drivers are still required to physically show their GST e-permits.
For Zoho, which has mainly focused on developed markets abroad for its cloud-based software products, GST is a tipping point. “A lot of factors are coming together in India to make businesses move to the cloud. We’ve been seeing traction picking up for our products in India. From July 1, we expect a really good boost,” says Siva.
Zoho has applied for a license to be a GST Suvidha Provider (suvidha means facility) – a new entity created by the government for those qualified to provide the backend tech for GST implementation. Accounting software maker Tally already has the license, along with several others, but Zoho’s cloud-based approach may prove more suitable and affordable for small and medium businesses. The Zoho Finance Plus suite costs INR 20,000 (US$310) annually in India.
GST has many layers, and accounting is just one of them. It also impacts business strategy. For some businesses, it could open up the opportunity to have production centers in less developed and lower cost regions, as levies on inter-state movement of goods come down. Large ecommerce companies may opt for automated and efficient central warehousing, instead of having warehouses in each state which was an incentive in the pre-GST era.
In other words, India’s big shift to GST not only has the potential to boost economic growth, but also adoption of tech. That’s good news for startups.