May 17, 2019

Nice post on demonetisation, GST and Rera

By Arvind Modi

Does everyone feel that Modi broke the backbone of the Indian economy by introducing demonetization, GST, and RERA?

I am an IT Project manager who quit a full time job to pursue my dreams as an entrepreneur. 90 out of 100 times I use auto correct to fix the spelling of entrepreneur when I write. Until 2.5 years ago, I had an abnormal IT job for 10 years that never had a start time or end time and then I decided I am old enough to spread my wings and fly off to pursue my dreams considering the fact that I am already used to work for odd hours. So I did!

In 2.5 years, I had a lot of learning, a lot of departments of a company that I would never have tapped are now being managed by me. One of which is ‘purchasing’. And this is where my opinion on demonetization and GST comes from.

Until demonetization a lot of our purchases were paid through cash and never had an invoice. Our choices were limited, most of the suppliers were unregistered large volume suppliers who used every loop hole in the law, bribed officers and have been doing large volume business (in crores) without a single tax ID.

Then, Demonetization happened. The first impact was on these suppliers. It was practically impossible for us to get new currency and pay them. This is when we started scouting for suppliers who would take online payment. Now most of these suppliers have tight knit families so with the 2.5 lakh limit and 20 people in the family, it was easy for them to ask us to transfer to one of the 20 bank accounts they gave us. They were pretty smart they thought! So for the next few months after demonetization, whenever we had an order to place we would get a new account number to make a payment to.

At this stage, our suppliers list has shrunken down by 50% already.

Now eventually came GST. GST is a game changer for every business man. The VAT system was pretty simple, almost every sale we had was either 5% or 14.5% taxable. Being an online business, our data was always ready and it took us less time to report our taxes and pay them. But I knew a lot of them misused this reporting by submitting false purchases and lesser sales (for online business every single payment is to the bank account so we can not float these values).



GST is way too different. First when you declare purchase from a supplier, on the other end the supplier also needs to approve the fact that they have invoiced you (B2B), a clear two way system. This means, the chance of cooking up purchase invoices is gone. A clear line of sale is being drawn.

FACT: Someone I know who paid his last VAT (Jun 2017) at 80k had to now after GST pay 3 Lakhs as tax. Not because the percentage increased, but because of the change in system he had to accept.

Now remember the fact that after demonetization, it is very hard to procure large volume cash to make vendor payments, which means, now most of the payments are going into the supplier’s bank accounts. For the supplier, it is not anymore easy to undercook your sales. Sales is greater than or equal to the money deposited into your current accounts.

Suppliers who never shared bank accounts started using them more often and learning about how to maintain their account.

Suppliers who never had GST are now liable to report because all their money is now in the banking system and they can not use savings account after a certain value. And buyers are forcing them to give GST bill for clear line of purchase and sale.

Buyers now understand that they can not procure stocks in cash so they need to opt for proper GST bill from their supplier.

The complexity of GST where you need to declare HSN level sales eliminates a lot of fraud. It is not easy to escape with false declarations now. You need to have super brains to fraud at this level and trust me, you wouldn’t.

At this stage, our supplier list is even filtered down and we are now taking stocks only from those suppliers who took online payment and provided us proper GST bill. The supplier list came down to about 20% of what we had at the beginning.

The change can not be visible at a consumer level yet. 3 years ago, if someone asked me what did demonetization do or GST do, I would be ranting about a lot of negative stuff mostly about how the pizza price went up or how I hate the 28% tax on the titan watch I purchased, but now as part of the system, I can see, a huge shift happening. The first question I ask when a new supplier comes is “Do you provide a GST bill and accept online payment” My last cash payment was on August 22nd 2017. Now we do not have a single supplier who doesn’t provide a GST invoice or doesn’t accept online payments.

Now comes the pitfalls of this system!

Post-Demonetization has released enough currency back into the system. Digital currency is not perfect yet. Swipe machines (EDC) have constant problems that are forcing people to find alternatives.

Payment gateways like paytm are not fraud proof. They are not really ideal for large setup. Imagine you paid and the other party didn’t receive due to a payment gateway error or the fund went into hold due to a technical error? Customer quickly shows you his screen with the amount and payment, what if it was a screenshot or a photoshopped image? Not all store managers are highly technical to quickly understand this fraud. A lot of us fail to check the transaction date and payment sms gets delayed to you (the seller). On top of it, why so many wallets? This is unsecured still.

A lot of pass through billing is happening still. Supplier doesn’t take money into his account but rather makes you pay into his supplier’s account. Your accountant can only match the transaction based on value but will really not worry about whom it went to. So the middleman still survives. So the middleman still continues to have unaccounted transactions.

The risk of GST is huge when a supplier vanishes. Imagine I purchased 20 lakh worth stocks from a supplier at 28% tax rate. Now I genuinely report this purchase but this supplier vanishes out of business and never approves this purchase (he needs to either upload it from his GST dashboard or approve the one that we submit to his via ours). What happens to this 28% tax I paid?

There is no proper helpline that answers your queries on GST. People are still struggling to understand what needs to be done. The shift was not well planned. The helpline number and email will only give you generic answers. Your local commercial tax officer still keeps complaining about how complex the new system is for him/her.

Lot of secrecy to avoid fraud but GST troubled a lot of genuine tax payers more than the fraudsters. The system should have been opened on a pilot run before the launch and proper feedback taken. For example, Lack of trust on your people is not healthy.

The software is not really ready. I opened my GST dashboard and I see an invoice from Sreevalli Vallabhaneni. I don't even know this lady. Apparently, instead of showing the firm name (say “Annapurna enterprises”) the system is showing the proprietor name. But half of these businesses we wouldn’t even know the name of the owner, we only know a sales executive who interacts with us and the name of the firm. I felt the system was very childish. Top of it, lot of husbands have this trend of starting business on his wife’s name. Now I cant even call a supplier and ask “whats your wife’s name”.

Considering the fact that you are not sure if your supplier would report GST for your B2B purchase, at some point, you will start feeling it to be better to make purchase without GST. There are 100 reason why the supplier wouldn’t report.

How many times have you purchased plywood with a bill? Walk to any plywood shop and the bill would have a “Estimate” written on the top of it. Now, charging 28% on plywood means, a lot of new home owners would just ask the material without GST bill, unless there is enough patrol on the roads stopping vehicles carrying large goods.

Finally, the GST patrol that will audit all the transactions, stop vehicles to check material and invoice will be offered heavy bribes. Does the government have a control on this?

‘Overall, I can say that GST and demonetization are great concepts which could have been implemented better with proper risk assessment and management. To build a reservoir, you need to stop the river water, build a dam and then release the river water. But the dam is no where visible, a flood is inevitable if ignored.

Do not panic. Large projects take time to show results. Education levels in India is increasing, globalization has its effect on us, patriotism exists. Old will end new will begin. Lets stop ranting and contribute to the system. Always ask for a bill. The seed you sow today, your children will enjoy the fruit tomorrow, they will thank you for sure

No comments:

Post a Comment