Archive for November, 2017

GST For Techies – Part 2

Friday, November 17th, 2017

Continuing from my previous post titled GST For Techies – Part 1, I’m covering some of the more complicated elements of GST in this follow on post. Part 1’s preamble applies here also but I also want to amplify my previous point about jargon.

Every specialty has its own jargon. GST is no exception. While many people rant against jargon, it’s impossible – even inadvisable – to avoid jargon while discussing any specialized topic. According to one study, a 6 page credit card agreement ran into 24 pages when shorn of jargon. So, we’ll have to live with GST jargon. That said, I’ve found a few terms used by CAs and third-party GST websites that are ambiguous or downright contradictory. Maybe accountants and compliance officers will make sense out of them but I’ve recasted those terms in a form that would make sense to a businessman (hopefully!).

With that bit of housekeeping out of the way, here goes my second installment of random rambling on GST.

INPUT TAX CREDIT

Like VAT and Service Tax that came before it, GST is a value-added tax. That is, a business is only liable for the tax on the value added by it. This means that you, as a GST registered entity, can claim refund of the GST you’ve paid to your suppliers (called “tax on input” in GST lingo). This is illustrated in the following diagram.

The actual process of claiming back the GST paid out is called Input Tax Credit (ITC).

To claim ITC,

  • Your supplier must be a GST Co and issue a B2B GST invoice i.e. the invoice must mention the supplier’s name and GSTIN as well as your company’s name and GSTIN.
  • You must verify that the supplier’s GSTIN stated on the GST Invoice is valid. When in doubt, use the Search Taxpayer feature on the GST Portal.

But these are only the necessary, but not sufficient, conditions to claim ITC.

That’s because, just because you’ve paid GST to a certain supplier does not mean you can deduct it from the GST you collect from your customer (called “tax on output” in GST lingo) and remit only the net amount to the government. To that extent, the above diagram is more an illustration of the principle of ITC.

The way it works in practice, it’s the GST Portal that does the netting of input tax (or not). You can get your ITC only if your supplier has remitted the GST he has collected from you to the government.

Which brings us to the obvious question: What happens if your supplier fails to remit the GST he has collected from you to the government?

You can’t claim ITC. Period. If it sounds unfair, that’s because it is.

What recourse do you have under this situation?

It’s too early to say but, in all likelihood, very little: The government will tell you to chase your supplier to remit the GST to the government. Your supplier will tell you to mind your own business. And your CA will rule out the possibility of the whole thing happening by quoting chapter and verse of GST law, according to which the supplier will get fined if he doesn’t pay up the collected GST by so-and-so date, blah blah blah.

But, if you’ve been in business for a few years, you’d have heard about the Kingfishers of the world who deduct TDS from their employees’ salaries and fail to remit the withheld money to the government for years. So, while I hope our CAs are right and that I’m wrong, I won’t rule out some fireworks on this front going forward.

With the basics of ITC out of the way, here’s how you can benefit from it.

If you look closely at your expenses, you might find that there are many items you use for your business but pay from your own pocket. These include office supplies, snacks and beverages, mobile phone connection, travel and such relatively small-ticket items for which you get bills in your name and submit them to your company for reimbursement. If these bills continue to be made out in your personal name, you won’t be able to claim ITC of the GST you pay on them (since private individuals are not eligible to claim ITC). Therefore, you might want to get B2B GST Invoices for these items in your company’s name so that you can claim ITC.

I’ve had a mixed experience on getting B2B GST Invoices, depending upon the supplier involved. I’ve come across the following four types of GST Co suppliers in the last four months of GST regime:

  • S1: Suppliers who will gladly issue a B2B GST Invoice if you simply tell them your company name and GSTIN e.g. VistaPrint, Venus Stationers
  • S2: Suppliers who will issue a B2B GST Invoice but only after you get your account transferred from your personal to your company name e.g. Mobile Network Operators. Going by my personal experience with the MNO described in When Does Negative Copy Drive Positive Outcomes?, you might have to jump through several hoops to complete this step
  • S3: Suppliers who issue an invoice labeled “GST Invoice” but the invoice neither mentions their GSTIN nor contains any details of GST taxes levied e.g. The Paper Store. I’m not sure if these companies are to be treated as GST Co or Non-GST Co suppliers when it comes to ITC

  • S4: Suppliers who collect GST from you but refuse to issue a GST Invoice e.g. TWS SYSTEMS PVT LTD. (Tofler).

Based on my experience, I’m happy to share the following tips while dealing with each category of aforementioned suppliers:

  • #ProTip for S1: Carry a copy of your GST Registration Certification in your wallet or smartphone so that you can quote your GSTIN at checkout whenever you’re buying something for your company from these suppliers
  • #ProTip for S2: Take a call whether the ITC earned is really worth the time spent on effecting the transfer of the account from your personal to company name
  • #ProTip for S3: Avoid these suppliers as far as possible
  • #ProTip for S4: Don’t touch these suppliers with a forty feet bargepole. IMO, they’re close to daylight robbers. I’ve complained about one of them to the GST Council but I haven’t heard back from it.

GST FOR SERVICES EXPORTS

VAT was applicable for export of goods. But Service Tax was not applicable for export of services. Now, GST is applicable for exports of both products and services. As stated earlier, GST registration is mandatory for anyone engaged in exports (even if they’re below the minimum turnover threshold).

One CA firm tells me that the GST rate for export of Services is 0% (as against 18% for domestic sale of Services). Whereas another CA firm maintains that the GST rate for services is the same for both domestic and export sales i.e. 18%. But both confirm that you can sidestep the incidence of GST for export of services by filing a Letter of Undertaking (if your Annual Turnover > INR 1 crore) or Bond (Annual Turnover < INR 1 crore). I’m in the midst of figuring this out and will update this post once I have it bedded down.

REVERSE CHARGE MECHANISM

Reverse Charge Mechanism (RCM) is arguably the most controversial provision of GST.

Normally, if you buy anything from a GST Co supplier, he’ll add GST to his bill. You’ll pay the base price and the GST to the supplier. The supplier will retain the base price and remit the GST to the government. Now, if you buy the same stuff from a Non-GST Co, the supplier won’t add GST to his bill. You’ll pay only the base price to the supplier. The government will be short the GST tax. To make up for this loss, the government makes you, the buyer, liable for GST. In other words, according to RCM, you pay GST on behalf of your Non-GST Co supplier.

Sounds draconian, right?

On first blush, yes.

But not so much if you dig a little deeper. Because:

  • RCM is applicable only if you buy more than INR 5000 worth of goods / services from one or more Non-GST Cos in a single calendar day
  • AFAIK, there’s nothing stopping you from splitting such purchases across multiple days such that the total spend on Non-GST Cos does not exceed the daily cap of INR 5K, thereby releasing you from the RCM obligation
  • Whatever you pay as RCM can be claimed back via ITC. So, RCM is more a cashflow than a cost issue.
  • Even if you don’t have enough revenues and, accordingly, high enough output GST amount from which to net off RCM, no problem: RCM never lapses and you have until eternity to claim it back via ITC
  • Last, but not the least, you might be able to shift virtually all your purchases from Non-GST Cos to GST Cos, thereby getting out of the ambit of RCM altogether.

But the point has temporarily become moot: According to the amendments to GST announced on 6 October 2017, RCM has been put on hold until 31 March 2018.


That’s it.

Hope you found my random ramblings on GST useful in your day-to-day business.

In case you want me to amplify any of the points covered in my two posts or have any other insights on how GST works for an IT business, please share in the comments below.

Cheque – The Unsung Hero Of #CashlessIndia

Friday, November 10th, 2017

As we all know, there was a severe cash crunch in India on the back of the demonetization of high value currency notes a year ago. To ease the pain, the government of India made a big push to promote digital payments. Trending under #CashlessIndia, the drive multiplied visibility of preexisting digital payments and led to the launch of several new digital payments. Among the former category were web A2A electronic fund transfer (NEFT, IMPS, RTGS), mobile wallet (PayTM, PayZapp), credit card and debit card (Visa, MasterCard, RuPay). Among the latter category were mobile A2A electronic fund transfer (BHIM) and interoperable QR code POS payment (Bharat QR).

Still, most payments formerly made with cash went cashless due to cheques.

Household Help

Take payments to maid servants, car drivers and other household help.

Both the maid servants in my house have mobile phones, although it’s a feature phone. While some digital payments work on feature phones, their UI is in English, a language they’re not conversant with. We offered to navigate the screens of these digital payment apps but they were not comfortable taking our help. We were wondering how to pay their salaries. Then we learned that they both had bank accounts. It was easy to write a cheque in their name, fill out a pay-in slip, and deposit the cheque in their bank’s drop box. They didn’t have to make any effort to go cashless.

Service Provider

Next, take monthly payments to newspaper agents, milkmen, laundrymen and one-off but regular payments to handymen like plumbers and electricians.

As I pointed out in my blog post entitled #CashlessIndia – Why Putting Cart Before Horse Will Work, my newspaper agent was happy to accept cheques.

Ditto my milkan, laundryman and handymen.

Finextra Member Chetan Ghadge points out why cheque is popular in this category: “…it is easier for them to keep a track of who has paid and who has not. These people don’t maintain computerised records so for them reconciling digital payments is very difficult.” (Actually, reconciliation of digital payments is not a small issue even for enterprises maintaining computerized records, as I’d highlighted in Enhanced Remittance Data Could Multiply Electronic Fund Transfer Volumes).

Rent

Now, take rent payments from tenants.

Once the landlord and tenant sign a leave-and-license agreement for a typical period of 24 months, it’s customary for the landlord to take twelve PDCs (Post Dated Cheques) for a year in advance. While the agreement legally binds the tenant to paying the rent on time, PDCs provide a practical way for the landlord to enforce the tenant’s obligation without having to go to court to enforce the contract. That explains their traditional popularity for this usage scenario.

With the plethora of digital payments available post #CurrencySwitch, it should be easy to find a replacement for cheques for rent payments. Or so I thought when I had a compelling reason to explore PDC-alternatives. (This happened a few months ago when my tenant was due to handover the next batch of PDCs to me and realized that he’d forgotten his cheque book in his home town, which was 500 kms away.)

But I was mistaken.

Some of the options like credit card and debit card were ruled out straight away because I don’t have a merchant account letting me accept a card payment. Others like RTGS, IMPS and UPI were not suitable because they didn’t (still don’t) support scheduling of future-dated payments.

The digital payment that came closest to supporting this use case was NEFT. This A2A EFT method permits the payor to set up Standing Instructions for recurring future-dated payments.

But, when I dug deep, I found two shortcomings with NEFT:

  1. A tenant can set up an SI on their Internet Banking portal but, to show it to the landlord, they need to log into their online banking portal and show the SI screen to the landlord. During the process, other personal information becomes visible to the landlord. Not all tenants might be comfortable with the ensuing loss of privacy.
  2. Tenants who’re not so sensitive to privacy may go ahead but what’s the guarantee that the tenant doesn’t cancel the SIs as soon as the landlord leaves after seeing them?

In contrast, the landlord has the PDCs in their possession. While the cheques can be dishonored on the due date, cheque bouncing is a crime. The threat of fine and / or jail time is a good backstop for tenants to honor their cheques.

So, I’ve still not been able to find a digital payment equivalent of PDC. (Under the circumstances, my tenant made an IMPS payment for the following month and gave me eleven PDCs after he visited his home town and retrieved his cheque book a couple of weeks later.)

And it’s not only in India. James Furlo, Rental Property Owner/Manager in Oregon, USA, explains on Quora why he prefers cheques for rent payments despite the availability of digital payments alternatives like SQUARE, Venmo and Dwolla.

Supplier

Cheques are also fairly popular in SME payments. By taking a PDC against the delivery of its goods, a supplier secures payments due in future from its customer.


There’s no denying that digital payments like BHIM have grown at a fast clip since demonetization. However, their sweet spot has been small value payments (two to three figures).

The retail and commercial payment usage scenarios covered above strongly suggest that cheque is a very compelling method of payment for large value payments (four figures and above).

On the first anniversary of #CurrencySwitch, I can’t help reaching the conclusion that cheque is the unsung hero of #CashlessIndia.

GST For Techies – Part 1

Friday, November 3rd, 2017

This is a random collection of my observations about GST based on discussions with a bunch of small business owners and a couple of Chartered Accountant firms. The objective of this post is to throw light on how GST works for a company in practice. While it’s impossible – even inadvisable – to avoid jargon when discussing any specialized topic, I’ve recast some of the GST jargon into terms that make more sense to a businessman (as against accountant or compliance officer).

In the context of this post,

  • “You” and “your company” refer to a GST-registered company that’s based out of India and is engaged in the IT products and services business
  • “Techie” / “techies” is used are as a catch-all for founders / directors / owners of IT companies, whether they come from technical or business background
  • Unless otherwise specified, “sale” and “purchase” mean “domestic” transactions i.e. not exports
  • Like in the case of common law, “man” includes woman, “businessman” includes women entrepreneurs, and so on.

I’m neither a CA nor your CA, so please take whatever I say with a pinch of salt.

With that preamble out of the way, here are my random ramblings about the Goods and Services Tax that came into effect on 1 July 2017 and underwent significant amendments on 6 October 2017.

APPLICABILITY

There’s a general feeling that GST is only applicable for private and public limited companies. That’s not true. All kinds of businesses – proprietorships, partnerships, LLPs, pre-revenue startups, freelancers, etc. – are prima facie required to be registered under GST.

If you were registered under Service Tax, you must get registered under GST even if you otherwise are exempted. The way it works, you need to first carry out the so-called “GST Migration” procedure. Only then can you exit GST (if you’re exempted).

If you carry out exports, you must be registered under GST, regardless of turnover. This statement applies even to freelancers doing business on Upwork and other export-oriented portals.

The technical name for a company registered under GST is “Registered Dealer” and that for a company not registered under GST is “Unregistered Dealer”. Maybe it’s only me but I find the term “dealer” repugnant to the context of a typical IT company. Therefore, I’m substituting the two terms by “GST Co” and “Non-GST Co” respectively.

GST INVOICE

Invoices are of two types: Sales Invoice and Purchase Invoice. Sales Invoice is what you issue to your customers against a sale. Purchase Invoice is what you receive from your suppliers against a purchase.

GST mandates a template for invoices and other artefacts like debit and credit notes. Even one look at a GST-compliant invoice would make it amply clear that it contains a lot more detail – e.g. HSN / SAC, Customer’s GSTIN, Freight – than the former VAT and Service Tax invoices. To fit my company’s GST invoice into one page, I had to reduce the font size from 12 to 10 points and change the page orientation from portrait to landscape.

Like VAT and Service Tax, you add the applicable GST on your Sales Invoice and collect the billed GST from your customer. Fairly straightforward.

Where things get a bit tricky is (a) the stage at which you pay GST to the government, and (b) purchase invoices.

GST IS NOT PRE-REVENUE

Like VAT and Service Tax that came before it, GST is payable to the government upon invoicing, whether or not you’ve collected your money from your customer.

This has caused the feeling that GST is payable pre-revenue.

Some have even insinuated that GST is being charged on estimated revenues.

None of these beliefs is true.

Invoice implies Revenue. You can book revenues whether or not you’ve collected your payment (it’s reflected in Accounts Receivables until you receive the payment). Since GST is payable only after invoicing, it’s not pre-revenue.

GST would be pre-collection if you don’t receive your payment from your customer by the time you need to remit the GST to the government. To that extent, GST does pose a strain on your working capital. However, that strain has reduced now: Formerly, you had to remit Service Tax by the 5th of the month following the date of your invoice. Under GST, the deadline has been extended by 15 days to the 20th of the following month.

I think the angst about GST being applicable pre-revenue or on estimated revenue is caused by the failure to distinguish between Booking, Billing and Collection. Although the common man thinks of all three terms interchangeably, they’re three distinct milestones in accounting and taxation.

For the uninitiated, Booking happens when you collect a purchase order from your customer. Billing happens when you fulfill the order (in part or whole) and raise your sales invoice (for the completed portion of the order). You book revenues at this stage. This is also the stage at which GST is payable to the government. Collection happens when you get paid by your customer. If you’re unable to collect on an invoice beyond a certain number of days, you write off the revenue by issuing a credit note. AFAIK, at that point, you can claim refund of the GST you’ve paid before.

GST RETURNS

Under the previous Service Tax regime, you had to file only two returns a year. Under GST, the number of returns has shot up to 13 per year for companies with annual turnover below INR 1.5 crores (@ 3 returns per quarter, 1 annual return) and 37 per year for companies with annual turnover exceeding INR 1.5 crores (@ 3 returns per month and 1 annual return).  This is a massive overhead on filers.

The GST Return calls for a staggering amount of information. You need to enter virtually every line item of every sales invoice and purchase invoice in your GST return. It’s obvious even to a non-techie like me that the GST Portal would require humungous amount of storage and computing capacity. I hope the powers that be took this into consideration when they wrote the rules on GST returns.


That’s it for now. In a follow-on post, I’ll cover a few more elements of GST.

(Spoiler Alert: The real fun begins in Part 2!)