Leveraging GST data for Flow based Lending

Access to formal credit continues to be one of the largest challenges faced by MSMEs in India due to lack of verifiable data about their business.Digital payments data combined with GST data has the potential to unlock millions of SMEs & bring them into the formal system. India is going through a Cambrian explosion of data usage. It is estimated that the monthly data consumption on every smartphone in India is estimated to grow nearly five times from 3.9 GB in 2017 to 18 GB by 2023 as per a report by Swedish telecom gear maker Ericsson.

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Picture Source: Digital Desh

As businesses and their processes get digitized, it provides us a unique opportunity to re-imagine credit products for MSMEs like never before.

In order to move from traditional Asset-based lending to Data based lending it is important to make the following design considerations:

  • Underwriting based on Data – Assess creditworthiness in real time based on the consented data provided by the user
  • Low-Value – Bringing down the cost of processing a loan using digital platforms like eKYC, eSign & UPI enables one to process sachet sized loans
  • Smaller Tenures – Offer small tenures to reduce risk and thereby build better credit history of a customer
  • Customised Loan Offers – In the old world, loan products were designed to be one size fits all; With data & better underwriting, create a “loan offer on the fly” for a borrower based on his need

Getting started with GST Data Based Lending – Basics

  • Over 8M+ businesses in India will file GST returns
  • Every invoice in the GSTN system is verified by the counterparty
  • GST returns are digitally signed and this data can be accessed through consent of a small business

To access this data, you need the understand the three types of GST APIs:

  • Authentication – Allows a taxpayer to login into his GST account from any application
  • Returns – Allows a taxpayer to file his returns from any application
  • Ledger – Allows a taxpayer to view & share his tax data with any application

You can access the GSTN Sandbox & APIs here: bit.ly/GSTAPIs

If you want more insights, do join the GSTN Discussion Forum here: bit.ly/GSTgroup

The GSTN Tech Ecosystem

Goods and Service Tax Network is a section 8 company set up to provide common and shared IT infrastructure and services to the Central and State Governments, Tax Payers and other stakeholders for the implementation of the Goods & Services Tax (GST).

In this context, it is important to understand the below two roles of GSTN:

  1. Direct portal for taxpayers – https://services.gst.gov.in/services/login
  2. Expose APIs thru GSPs (GST Suvidha Provider) – http://www.gstn.org/gsp-list/

GST Introduction (1)

GST Suvidha Provider (GSP) – Companies which provide GST API Gateway as a service to application service providers; They are appointed by the GSTN and list of the GSPs can be accessed here:http://www.gstn.org/gsp-list/

ASPs – Companies which provide the user interface for business to file or fetch their returns from the GSTN

Naturally, ASPs are a great fit as distribution partners for lending as they own and control the end user experience of small businesses. Some of the examples are:

Accounting Software Providers

    • They help small business manage their accounting, inventory & even payroll;
    • They have rich data sets about the small business including their GST returns Eg: Tally (Desktop), Zoho/Cleartax/Profitbooks (Cloud-based)

Tax Filing Software Providers

    • These companies help business who use excel/manual billing/custom software to prepare their GST return & file it every month;
    • One of the key stakeholders here is the accountant who essentially is the business advisor for an SMB and tapping into them as an influencer channel is a great opportunity Eg: Cleartax, SahiGST etc.

Supply Chain Automation Companies:

    • Today many FMCGs and Large manufacturing companies are using software to track their sales/inventory in their supply chain; For e.g: Asian Paints, Tata Steel, ITC etc.
    • As these companies enable a large of wholesalers, retailers to use their software problem, there is a great opportunity to extend credit to their entire ecosystem
    • Eg: Moglix, Channel Konnekt, Bizom etc.

Example of a Lender – ASP Partnership

  • Consider a services-based company which provides advertising services to multiple companies
  • Let’s assume they use an accounting software like for example Cleartax or Zoho
  • In the software, the SMB sees a one-click credit button (This is enabled through an integration with the ASP & lender)
  • In a few clicks, the SMB is able to share multiple types of data like – GST, Payroll, Balance Sheet, Bank Statement etc. with the lender
  • With consent, the lender uses this data for underwriting, build a credit score and makes a credit offer to the SMB
  • The SMB provides his bank account details for real-time loan disbursement and based on the type of the business you can complete KYC
  • Take mandate either digitally or physically based on the customer for repayments

There are various other data sources one could use to improve the underwriting like – Smartphone, Payments Data from the Bank, Bill Payments, Electronic Toll Collection & various others. Algorithms can use these data sources along with other other public data sets like – Seasonal demand for a product, Import/Export, GDP, Consumption Patterns to do contextual lending.

We recommend you go through the presentation above to understand these basics & do watch the pre-recorded webinar session below on How to Leverage GST data for Flow-based lending for more details.

At iSPIRT, we are working with multiple stakeholders to create a winning implementation of Flow-Based Lending. Do watch out for future announcements from us for entrepreneurs working in this space or write to us community[email protected] to know more.

About the Author

Nikhil Kumar is a full-time fellow with iSPIRT Foundation, a non for profit think-thank and has been focussed on building the developer ecosystem for the India Stack.

Twitter: @nikhilkumarks

Software Exports – GST makes it difficult to do business

The GST was welcomed by all as a revolutionary measure. We had covered one earlier topic, “How GST will work for software exporters”. There have been many changes in last few weeks before GST was launched in the IGST law.

Please note that “GST law” treats Software as “Service”. Hence, there may be a mention on “Software” and “Services” in mixed manner in the write-up. This write-up is just focusing on problems and issues created for exporters by the GST process. On details of process there are many blogs on internet.

After launch of GST since 1st July 2017, we came across many questions and concerns on how GST on Exports. I have been trying to write a piece on how the process works for Software exports under GST. However, the policy and process for export of “Services” was not at all clear. I have myself struggled through,  and it has taken more than 6 weeks to understand the process, raise exports invoices and multiple documentations required.

GST has turned out to be nightmare, especially for Small and medium Software exporters and will continue to do so, unless corrective measures are taken up.

Let us look into how process required to be complied, caused problems.

Exporting Software under IGST law

IGST law on one hand treats exports as “Zero-rated” supplies and on the other hand treats exports as “inter-state” trade instead of “International trade”. These two corollaries of GST law are inherently paradoxical.

Being Zero-rated there is no tax or duty on export. However, being Inter-state trade (rather than being international trade) it requires payment of IGST under IGST law.

If one delves deep in to this application of IGST on exports, it clearly comes from concern of tax policy makers on “Goods”, moving in a container and a compliance assuring good reach port of export and gets exported finally. That this does not apply to services has not been thought over by the GST law makers. (the assumption may be services will adjust in due course of time)

Hence, as per IGST law an exporter is required to either

  1. Pay IGST 18% on Software export and get it refunded

Or Export without IGST by

  1. Filing a Bond if the exports in previous year were less than rupees one crore.
  2. Filing a LUT if the exports in previous year were more than rupees one crore.

Filing a Bond requires submitting a Bank Guarantee to GST department up to 15% of the amount of duty applicable on estimated exports value in a given (say a year). The jurisdictional office of GST has a discretion to decide bank guarantee amount anywhere from Zero to 15%.

If the office approves zero % (or nil) bank Guarantee, the department asks a set of declarations and data of past year.

Anything that is based on discretion in regulation, also brings in corruption with it. Whereas there is news from many places that jurisdictional GST office are waving bank guarantee clause for Software/IT exports. There is also news that GST department is randomly asking for bank guarantees.

Problems created by IGST law

Locking of working capital

A small software exporter or a startup not having more than 1 crore of “export turnover” in past year will have to opt for either option a) Or b) from above choices i.e. either the exporter has to pay duty and get a refund or has to sign a bond with bank guarantee.

If the bank guarantee is not waved by the jurisdictional officer, the exporter will have to keep the bank guarantee replenished continuously to support regular exports.

gst-workingcapital

In either of the cases the IGST law locks the working Capital of the start-up or small exporter.

The GST law therefore goes against policy of Government of India to promote startups. It also is going to be regressive measure for large number of small IT companies, IT consultants and freelancers.

Discretion causes corruption on ground

Anything that is based on discretion in regulation, also brings in corruption with it. For those who want to file bond, the jurisdictional office of GST has a discretion to decide bank guarantee amount anywhere from Zero to 15%.

Whereas there is news from many places that jurisdictional GST office are waving bank guarantee clause for Software/IT exports. There is also news that GST department is randomly asking for bank guarantees.

GST department’s manual intervention in Exports

Exports before GST were never allowed to report or get clearance from Indirect tax departments. Now, GST department has become a gateway for every exporter of Goods and Services, thus extending mandate from domestic tariff area to international trade also.

What is cause of concern is this intervention of GST department is manual as against the principle of making entire GST system end-to-end digital. This give power in hands of indirect tax officers to monitor exports.

This perhaps is a fundamental error that Government of India have made, against it’s public stance on “Ease of doing business.”

This is a problem for all exporters including those with “export turnover” more than 1 crore and eligible to sign a LUT with GST.

It is more of less like traffic policing the exports on regular basis and heavily increased compliance.

GST has no focus on Software exports

The entire GST law has been written with physical Goods in mind but applied equally to both Goods and Services. Once again Government of India has made a classical mistake. It is an irony that a nation that is known to be power house of Software has not focus of tax authorities on “Software exports”.

The concept of Bank-Guarantee is detrimental to Startup eco-system and SMEs

Startups and SMEs require removal of regulatory barriers for them to grow. GST law has done just the opposite. It requires small exporters and Startups to furnish Bank Guarantees.

GST for supplying to SEZ

SEZs are deemed to be considered outside the customs territory of India. Hence, supplies to SEZ units by exporters in India i.e. DTA will be treated in same manner as exports to clients located outside the country.

Therefore, if a Startup or a Software product company is selling to an SEZ unit, the process will be same as that of exporting.

Conclusions and Recommendations

Government of India has seriously lost focus on “Ease of doing business” agenda, startup policy, SMEs and supporting self-employed professionals while framing GST/IGST laws.

It is recommended that

  1. Government of India should notify a clearly stated policy for Services and Software exports and not mix or generalize with remaining Goods exports.
  2. The GST department should have no or minimum (limited to Digital medium) only in regulating exports of Services and Software
  3. IGST duty and refund mechanism and also Bank-Guarantee or LUT should be done away for Services and Software export. A quarterly and annual reports is enough on digital platform, regulated digitally. In order to bring or include Services exporter under DGFT regulation, IEC can be made mandatory and used to regulate Services trade. IEC is same as PAN now, hence, IEC can be used by all size of exporters.

How GST will work for software exporters

GST council has yesterday cleared all the bills required to implement the GST. Finance minister wants to kick-start from July 1 2017. This can be easily achieved is the model laws can be enacted in the current session of parliament. The GST is therefore set become a reality from the second quarter of the current financial year.

GST is going to catalyze greater IT adoption. We can see the business going digital in future and a Digital India emerging.

Apart from receiving GST as a catalyst for Software product industry growth, we also need to get prepared for adopting GST our selves. Not everyone has prepared for GST though. At iSPIRT we are starting discussion group on GST so that community can take advantage from shared learning. This blog is the first in series of this effort.

Few fundamental changes in the Goods and Service tax (GST) as it is called are

  • It is supply based and not sales based tax system
  • Being an indirect tax, it applies where the consumption happens
  • There are three statues and taxes that are part of GST i.e. SGST (state GST), CGST (Center GST) and IGST (integrated GST = SGST+CGST)
  • Both state and center will get tax on Goods and services supplied unlike earlier only Center received the service tax
  • The GST subsumes many of the indirect taxes prevalent at present

GST will significantly change the way of doing business. Also, it is bound to greatly impact the international trade regime e.g. excise duty will merge in GST and deemed exports benefits under excise laws may come to an end. The exports aspect will impact Software exporters, irrespective of whether they are operating under SEZ, STP, EOU, EPCG or outside as these export schemes. GST on Import is going to impact every one, as in globalized world with cloud penetration, everyone is bound to use goods and services imported.

In this blog we cover in brief the application of GST on the import and export of goods and services.

How it impacts Import?

Basic custom duty (BCD) is not covered under GST and it will remain same. There will be two components on each import to be paid i.e. Basic Duty + IGST.

IGST will subsume currently applicable countervailing duty (CVD) and additional duty of customs (SAD).

Integrated Goods and Services Tax (IGST) means tax levied under this Act on the supply of any goods/services in the course of inter State trade or commerce. IGST has two components SGST and CGST. A supply of goods/services in the course of Import into the territory of India shall also be deemed to be a supply of goods/services in the course of inter-state trade or commerce.

The levy of IGST will be payable for each transaction, as against the monthly payment in case of IGST payable on domestic interstate transactions.

The other difference in GST is aboput IGST computation. The IGST will be computed on transaction value of imported goods plus duties and taxes etc. charged under any statute other than the GST Law. Hence, ISGT will be applied on total landed value, basic customs duty and any other charges.

On import of services GST will be based on reverse charge method just as the Service tax is today i.e. IGST will apply on reverse charge mechanism. Hence, all Software or a SaaS bought online will be subject to reverse charge basis IGST.

But there is a input credit allowed in ISGT on imports. The service provider, trader or manufacturer of imported goods/services shall be eligible to offset IGST paid on import of goods/services against his output liability. The same does not apply to BCD as BCD is not part of GST.

Although it does not apply to Software sector, the anti-dumping duties and safeguard duties will continue to be applied as they were and have not been subsumed in the IGST.

Impact on exports

Exports under GST will be Zero rated i.e. there will not be any exports duty except on items that enjoy an export duty levy currently. Software exports will be zero rated.

The biggest impact will be on units presently enjoying exemptions on inputs like service tax in SEZ. Under GST all duties and taxes will be payable at the time of a transaction when procuring input goods/service and the exporter can get refund for these after exporting. Exemptions will be replaced by refunds after exports.

This will put lot of burden on arranging working capital for the inputs. This burden will be higher for manufacturing firms than services firms.

On pursuance of commerce ministry, in a recent announcement, the finance ministry has agreed to relax the refund pains. The finance ministry has agreed to refund 90% of the duties paid by exporters within a period of seven days under the Goods and Services Tax (GST) regime. If duty refunds could not be made within seven days, then government will pay interest to exporters. However, it is yet to be decided how much interest will be paid to exporters in such a scenario, as per announcement. (Source: livemint news item)

The remaining 10% refund will be made after verification by tax authorities.

This is a bit of relief to exporters. Compliance process will change from presently exemption based compliance to a refund claim filing in time.  The crux here is to use digital technology to automate many of these issues in GSTN.

Whereas these announcements have been made, the details will depend upon how rules are notified.

GST will undoubtedly make the efficient in long run. However, the next one year will be full of challenges and adjustments by Ministry of finance to oversee a smooth rollout.

Should you have further questions on GST, please write to [email protected]

 

 

 

GSP at GSTN what we know till now

Recently GSTN invited application for becoming GSTN Suvidha Provider (GSP) under GSTN for enabling much awaited Goods and Service Tax. GSTN received total 344 applications. CEO GSTN reported in GSP workshop on 25th October that about 98 of these applicants are qualified for further evaluations according to them.

gsp-at-gstn-what-we-know-till-now

The GSP application process, when started created lot of confusion and concern on the eligibility criteria. The eligibility criteria are given here. One common concern was the financial capability criteria’s set by GSTN of:

  1. Paid up / Raised capital of at least Rs. 5 crores and
  2. Average turnover of at least 10 Crores during last 3 financial years.

iSPIRT had proposed that instead of a heavy turnover criterion the GSTN could have used a performance guarantee or a surety bond, both to ascertain the serious players and cover the risk of fly by night operators. This would allow some startups to take the risk and succeed to become GSPs.

The announcement did not clarify what is a GSP or what role will it have in the system.

A large number of interested startups through the GSP was about an application provider of product to file and comply with GST. Hence, the above criteria were considered as a barrier to startups. GSTN although off the record said they will accept application from all and will then evaluate who will be fit to become a GSP. This was however a very subjective approach, where GSTN will use their discretion to allow an enterprise to setup a GSP or not.

These concerns and doubts created confusion in minds of many startups, who have been looking towards the GST as an opportunity to innovate and implement in the space of tax compliance with added value with analytics and business intelligence.

It is subsequent to the workshop that many of these doubts have been cleared.

What finally turns out to be is that the GSPs are the middle layer infrastructure or utility provider or a API gateway to large number of GST filing apps. There may be a mix of GSP/ASP model where an ASP sets up a captive GSP. Even in that case GSP is merely a Gateway.

This blog is to answer some of the questions raised by participants in a Google Hangout conducted by Nikhil Kumar an iSPIRT volunteer. Additionally, it also answers other basic question with the related topic of GSP.

What is GSTN?

GSTN stands for Goods and Service Tax Network. It is a section 8, not for profit private company, with shareholding of Government of India, Government of States and UTs and financial institutions.

As a Special purpose vehicle(SPV), GSTN’s mandate is to establish, develop and manage the required infrastructure, systems, technology, partnerships and eco-system for implementation of GST.

What is a GSP?

GSP stands for GSTN Suvidha Provider. GSTN does not want to facilitate or connect to Goods and Service Tax filing application (called ASPs by GSTN and in this document) directly. This is for reasons of security and scale. Therefore, GSTN has planned a number of GSPs who will act as a middle layer between the ASPs or business and GSTN.

GSPs will facilitate the use of GSTN system to the businesses as well as products and application (developed by ASPs) to file the GST returns, match sales and purchase invoices to settle tax credits. The GSPs will hence help secure GSTN from direct exposure to users on internet as well as distribute the load in a large economy like India.

A GSP will hence act as a gateway that will pass enable the pass through of GSTN APIs (application programming interface) to and from users. There are three types of GSPs envisaged:

  • Plain GSP (Independent GSPs) who will just facilitate the ASPs to use them as Gateways
  • Captive GSPs – (GSP/ASP) used by large businesses for their API consumption/pass through. These may include ASPs wanting to become GSP and use the GSP for their APS having heavy load
  • Open GSPs (GSP/ASP + ASPn) who may use for their ASP and also allow independent ASPs

gsps

Source: GSTN website click here

This is how it is depicted in the above slide shown in GSP workshop. However, during the talk on GSP workshop it was mentioned that it will be mandatory for all GSPs to allow any ASP to use the GSTN APIs. Hence, it remains to be clarified by GSTN, weather the model 2 shown in above diagram means a Captive GSP and weather a captive GSP can deny access to third party ASPs to it’s GSP.

GSTN will sign an agreement with the selected GSPs which will govern the contractual relationship between GSTN and GSPs.

How many GSPs would be allowed?

There is no final decision on how many GSPs will finally exist or be allowed. However, in the first phase, 98 GSP applicants would be allowed to participate in the technical evaluation. How many will pass or how many more will be evaluated has not been declared yet.

Who is an ASP? What is relationship between an ASP and a GSP?

Application Service Providers are – Accounting Software, Invoicing Software, Point of Sale (POS) systems and other innovative applications that can enable businesses comply with GST. ASPs can work with multiple GSPs to enable GST for their customers.

Some ASPs may also have their own captive GSP. Dominant accounting and ERP product companies may have their captive GSP as this further opens up in future.

ASPs will have a contractual relationship with GSPs that they use.

How many ASPs can exist? Does ASP is related to GSTN under a formal relationship?

As per GSTN, they do not want to control the ASPs and leave this for market forces to decide how many ASPs can be there.

ASPs are not a directly related party with GSTN. ASPs will have a contractual relationship with GSPs and GSTN will ensure the GSPs provide a free and fair access to ASPs to the GSTN resources.

Can an ASP apply to become a GSP later?

GSTN , says yes they will evaluate on case to case basis. There is no defined policy. On eligible as per the criteria laid out it in the next phase

What are the commercial terms for a GSP?

As per current information, GSTN will waive the first year charges for the GSPs. However, the GSPs would be allowed to charge the downstream ASPs. GSPs can also provide value added services on top of GSTN APIs and charge for them.

Again there is no define answer. The market will decide many things in future. For startups and small ASP players, it is important number of independent GSPs emerge for a fair and free market to exist.

Can GSP share or use Data for business?

As per announcement at GSTN workshop, the GSPs will not be allowed to share the GST data of businesses filing returns or sell the data to third parties. However, GSP can use this data themselves to create value added service offerings like business analytics and charge the individual businesses to do so. This means the data can be used to create a service offering for the given business only and cannot be cross sold to other parties. GSP will have to strictly adhere to data privacy clauses.

How will GSTN ensure third party ASPs get GSP services early on launch of GST?

NSDL e-Governance Infrastructure Limited (NSDL e-Gov) is the depository (promoted by NSE, now running infrastructure and services for many mission mode projects of Government of India. NSDL is also slated to run the GSTN services.

NSDL will provide the neutral GSP services as an official independent GSP to ASPs. GSTN thus ensures that at least one GSP is ready for third party ASP providers get a GSP to serve the market.

Will GSPs expose the same API set as per GSTN Sandbox?

As per GSTN answers to this questions, the GSPs will be legally bound to expose the GSTN APIs on a complete transparent pass through. However, GSP can provide additional rapper APIs for value add that they will like to build or management of their system.

Will the developer sandbox be available to anyone?

As per GSTN response, Yes.

Will there be any further workshops or hackathons?

GSTN may conduct these in the future. However, none planned as of now.

Where can one find the workshop PPT and other resources of GSTN?

One can use following resources of GSTN to get to more details.

What is iSPIRT pitching for?

At iSPIRT we are continuously involved with GSTN. Role of GST will be a game changer for India’s economy.

Our endeavour is that GSTN is able to offer a thriving platform for number of Product companies existing and new. It is also able to provide an open environment for innovation that can help some startups emerge offering valuable products to the business community.

[this blog is based on Google Hangout conducted on the topic by iPSIRT voluteer Nikhil Kumar, the inputs at GSP workshop conducted by GSTN on 25 Oct 2016 and group discussions with Bharat Goneka, Pramod Verma and Gian Franco Bonini of iSPIRT]

Implications of GST Bill on Startups

The much-hyped Goods and Services Tax (GST), after years of stagnation and lack of political consensus, was finally passed in the upper house of the Parliament, the Rajya Sabha, on 4th August this year, almost a decade after it was first introduced in the Lok Sabha in the year 2006-07. It is the biggest indirect tax reform post economic liberalization of 1991.

implications-of-gst-bill-on-startups

The economists say, a double-digit growth in GDP, which seemed too surreal, will now be a reality. This law aims to give a boost to the new age start-ups and make India a conducive place to conduct business. Currently, India is home to around 4,200 startups growing at an exponential rate of 40% yearly. It is predicted that, with further relaxation of rules, India will be home to around 11,000 startups by 2020. This can be corroborated by the fact that India was ranked poorly at 142nd in the ‘Ease of Doing Business’ survey conducted by the World Bank in 2015. With relaxation in the rules and regulations of setting up a business and lucrative schemes like ‘Start-up India, Stand up India’, India went twelve places up and ranked at 130 in 2016.

Before getting into the nitty-gritty of how beneficial will the new law be for startups, it is important that the basics of this law are first looked into. GST, as mentioned above, is an indirect tax reform also known by the moniker – ‘One India, One Tax’. Different states have different tax structures which make the taxation structure very cumbersome and complex. This is a major reason why many start-ups are hesitant to expand their businesses to different states leaving the state concerned with little industrialization and low creation of jobs. GST aims to bridge the gap by integrating all taxes, making only one tax to be paid by everyone. As a result, the tax calculations will be simpler, saving time and energy for entrepreneurs and start-ups to focus on their respective businesses instead of investing time and energy on compliance and paperwork. However, just passing the bill is not the end of the story – there are rules to be framed, tax rates to be fixed, the central and state governments must reach a consensus, and proper infrastructure needs to be put in place. Hence, the implementation of GST still has a long way to go and is likely to happen in mid-2017.
Implications Of GST Bill On Startups

How Does the GST Help?

The Act is deemed to benefit all types of businesses but start-ups and SMEs are to benefit the most. It has been structured in a way keeping in mind the concerns of the small businesses. This is elaborately explained in points mentioned below –

Simple Taxation – Instead of adhering to different tax regulations in different states, GST simplifies the process by making it simpler and clear by integrating all taxes into one so that not only money on taxes are saved but time on compliances are saved too.

Ease of Conducting Business – Registration of VAT from the sales tax department of the state concerned is an imperative to start a new business. A business intending to establish in different states has to apply for VAT registration separately. Not only this, the VAT fees in different states is not uniform, making this one among the many other issues regarding the problems faced by startups and existing businesses in India. To fix this anomaly, the GST Act has provisions which will make VAT registration centralized, uniform and simple for companies. The concerned company/business would just need to get a single license valid pan India and pay taxes regularly. This will further help startups to establish, expand their business hassle-free.

Integration of Multiple Taxes – In addition to the VAT and service tax, there are other tax regulations that must be complied by the businesses like Central Sales Tax, Luxury Tax, Purchase Tax, Additional Customs Duty etc. Upon the implementation of the GST, all such taxes will be combined into one.

Lower Tax Rates for Small Businesses – At present, VAT is applied to businesses having an annual turnover of INR 5 lacs and above. GST aims to cap this limit to INR 10 lacs only and businesses with turnover between INR 10-50 lacs will be taxed at low rates. This move will not only bring respite to the start-ups but also help them invest the money saved on taxes back in their business.

Improvement in Logistics efficiency – Seamless movement of goods is currently a problem with border taxes and checks at state borders which delay the movement of goods which, in turn, results in delayed deliveries and enhances the product cost. GST aims to eliminate such inefficiencies making the inter-state trade less time consuming. With an uninterrupted movement of goods across the border, the costs associated with maintaining the goods will significantly reduce. According to a CRISIL analysis, the logistics cost of non-bulk goods can go down by as much as 20% once GST is implemented.

Other Side of GST: The Cons

While there are other advantages for the start-ups as well other than the ones mentioned above, the new Act also comes with implications, not necessarily for the start-ups. Start-ups in the manufacturing sector with lesser turnovers might have to bear the brunt of paying duty. As per the existing excise laws, any manufacturing business with an annual turnover of less than INR 1.5 crores is exempted from paying duties. But when the GST comes into force, the chances are, this limit could be reduced by six times to INR 25 lacs. This can have a detrimental effect on the growth of start-ups.

There are high chances that the inflation might rise after GST implementation. Also, whether ‘mandi tax’ would be included or not in the GST is ambiguous. Such causes can adversely affect the food startups.

Critics also say, the implementation of GST would also affect the real estate business and add up to 8% of the cost in new homes and as a ramification thereof, reduce the demand by 12%.

Despite its implications, GST is the most important and business friendly tax reform in India which will lead to a double-digit growth. It seeks to unify, integrate different tax structures so that there will be transparency and efficiency in the way businesses operate and the government levies taxes. This won’t just reduce the cost of the products but also create employment opportunities as more startups rise and India becomes the startup capital of the world!

Guest post by LegalDesk.com, a Do-It-Yourself legal platform for making legal documents online. LegalDesk helps startups with incorporation and legal documentation services. It also provides Aadhaar-based eSign service to businesses.

Tax challenges being faced by the(SPI)Software Product Industry and Budget Recommendations made by iSPIRT.

With the budget closing in on the industry there are hectic conversations to represent the Software Product Industry in the right manner in the Ministry of Finance. The tax issues both on the Indirect Tax and Direct Tax have been plaguing the Industry for a long time and this hangout addresses the things which need to be done very well. The Indepth Knowledge of  Bharat Goenka (Tally Solutions) and the  moderation done by Sumeet Kapur(Employwise) leads to an in-depth conversation on the Tax issues.

Bharat divides the two issues into, First, the Direct Tax about TDS the why and when it should be applied along with Industry perspective, the second issue was Indirect Tax – the confusion around excise and service tax relating to products and its definition and applicability of VAT .

It becomes important to introduce the Constitutional Framework under Indirect taxes which broadly talks about Manufacturing and Services being taxed by the centre and anything that is traded is taxed by state.

Confusion arises around “Service” and “Right to Service”. Whereas “service” is not tradable a “Right to Service” when sold is a tradable e.g. a Mobile phone service being provided by a Telco is a service where as when a vendor sells a recharge coupon he is selling “Right to Service” that actually will be provided by the said Telco.

Hence, under this concept of “Right to Service” tends to be tradable until the service is rendered and not after it is consumed, because the title to right to service is nor more existing after consumption. Service is therefore treated as tradable commodity thus qualifying for VAT in states and the Center charging service tax, this leads to invoicing for both VAT and Service tax on a software product.

What is needed is clarity on the issue of tradability of service as “goods” and “service delivery” as “service”.

GST will bring in changes but the taxes will be shared between states and center. GST it self may not fully solve the problem of duality of tax on software products. The problem of duality on VAT and service shall be sorted out only when there is clarity on “Right to Service” as a tradable commodity and “service” is achieved.

We as an Industry need to help Government formulate a distinction between “Service” and “Right to Service” as a tradable, so as to do away the duplicity of VAT and Service Tax so that service tax is charged only on part of service and VAT only on tradable value added portion if and when a service is traded further by channel partners of the service provider.

Direct Taxes (TDS)

Sumeet introduced an issue on TDS. Primarily a TDS made by payers to software company leaves less cash on the money collected. This is mainly for software product which sold leaves the product company with 10% less cash on the money collected.

Bharat mentioned that Software despite being a tradable product is the only product that is subject to TDS. This creates a bigger problem for the young companies and growing industry as early years do not allow you the sufficiency of profits.

We need to bring in front of Industry that no trading activity should attract TDS. Also that by doing away TDS the Government is allowing the profitability and business growth thereby allowing more business to happen and widening the tax base eventually.

Sumeet was of the view that, if software product companies are being subject to a TDS there should be Tax credits available on service tax so that the cash availability to businesses can be balanced.

Bharat added yes we can represent to the Government on this that either give me an input credit or refund TDS on day I file my return. Sumeet added that refund must be done even if there is a scrutiny.

Pramod from Nucleus Software added that in an event the question of Duplicity of VAT and service tax was raised to the Revenue Secretary, who showed his inability to do away with duplicity on tax as VAT is a state subject.

Conclusion

Many of the changes in law have come in past few decades and there was a lack in taking the cause to Government or lack of sufficient clarity in helping Government to clearly define distinction between Goods and Services and to separate out Right to Service being traded verses Services.

Bharat Concluded by saying, in the present efforts done to represent to government, we are looking at adequacy of clarity and this clarity is much needed even if the GST is coming to solve the issues and problem in this regard.

The detailed budget recommendations can be seen here.

With Inputs from Sudhir Singh, ExcelICT