Dual GST and it’s affect on your Business

Implemented in 2017, the GST system in India has revolutionized indirect taxation. This GST (Goods and Services Tax) structure comprises Central GST (CGST) and State GST (SGST) or Union Territory GST (UTGST). The dual GST regime impacts businesses significantly – affecting pricing, Input Tax Credit (ITC), and overall operations. In this article, we will understand dual GST, its impact on business operations, and the benefits of adopting this taxation structure.

What is Dual GST?

The dual GST system in India consists of two components: Central GST (CGST) and State GST (SGST) or Union Territory GST (UTGST). This structure differs from a single GST system by dividing tax collection between the state and central government. This ensures the appropriate allocation of revenue among the state and central government.

The GST regime levies CGST and SGST in intra-state transactions, whereas it subjects inter-state transactions to Integrated GST (IGST). For example, consider a manufacturer in Maharashtra selling goods worth ₹100,000 to a retailer in the same state. The transaction would incur CGST and SGST at 9% each, totaling ₹18,000 in tax. However, if the same transaction occurs between Maharashtra and Gujarat, IGST at 18% would apply.

Impact of Dual GST on your business

This taxation structure impacts your business operations in terms of compliance burden, working capital, and technological adaptation. Let us look at how this tax structure affects business operations in detail.

Compliance and Administrative Burden

• Registration requirements under this GST regime require you to obtain separate registrations for each state of operation.
• Filing of returns becomes complex, with multiple forms and frequent deadlines.
• Careful tracking of business transactions to calculate Input Tax Credit (ITC). ITC is the credit that businesses can claim for taxes paid on inputs used in the course of their business activities.
• It also includes managing varying tax rates across states, reconciling accounts, and staying up to date with GST implications.

Cash Flow and Working Capital

• Dual GST requires increased need for working capital due to tax payments on both inward and outward supplies. FlexiLoan offers business loan upto ₹2.5 crore against your invoices that can fulfill any urgent working capital loan requirement.
• Under this GST structure, you need to pay taxes before receiving payment from customers. This affects your business working capital.
• You need to reassess your product pricing strategies at a regular interval. The GST implications on input costs and tax credits requires pricing adjustments to maintain profit margins.

IT Infrastructure and Technological Adaptation

• You need to update your existing accounting and billing software to handle the complexities of CGST and SGST calculations.
• SMEs should modify their databases to store and process information for both CGST and SGST components.
• This taxation structure requires real-time reporting of transactions. This means robust IT systems capable of handling high-volume data processing.
• IT systems need to be flexible enough to accommodate frequent changes in GST rules and rates.

Benefits of Dual GST for your business

Reduction in tax cascading: Tax cascading happens when the government levies taxes multiple times on the same product or service as it moves through the supply chain. Businesses can claim Input Tax Credit for both CGST and SGST. This eliminates tax on tax effect, allowing you to lower your business overall tax burden.

Simplified tax structure: The GST dual structure has consolidated multiple indirect taxes like VAT, excise duty, service tax, etc., into a single unified tax. This simplification now requires you to file fewer returns and deal with fewer tax authorities. The uniform tax rate across most goods and services makes accounting and bookkeeping simpler. Many small businesses now fall under the Composition Scheme. This allows them to pay a lower flat tax rate on their turnover.

Enhanced ease of doing business: The unified tax structure has eliminated interstate tax barriers. This has opened up new markets for small businesses, increasing their revenue and improving their business loan eligibility. The GST’s digitized online portal makes it easier for businesses to register, file returns, and claim Input Tax Credits.

This increased efficiency in tax administration has improved ease of doing business.

Improved tax compliance: Under this GST regime, businesses need to file returns for both CGST and SGST. This makes it easier for authorities to cross-verify transactions, thereby reducing the scope for tax evasion. As a result, SMEs operating under this tax regime have become diligent in their tax practices. This improves their overall compliance and enhances their business loan eligibility.

Better tracking of transactions: With every transaction recorded digitally and linked to both CGST and SGST, businesses now have a clearer picture of their financial activities. This improved tracking system help you in terms of claiming Input Tax Credit. This also enables you to better cash flow management. This enhanced financial visibility can be beneficial when applying for business loans, term loans, or lines of credit.

Increased trust and credibility with stakeholders: The GST dual structure has a positive impact on business relationships. Suppliers, customers, and financial institutions, now have greater confidence in the financial reporting of your business. The tax structure also helps in easier audits. This boosts the credibility of SMEs in the eyes of potential investors and partners. This increased trust can also get you a collateral free business loan.

Common Challenges Faced by SMEs under Dual GST

Complexity in understanding and implementing: Many businesses struggle to understand the complexity of this dual structure. Different tax rates, Input Tax Credit mechanisms, and interstate transactions makes it confusing. This complexity requires expert guidance, which can be costly for SMEs with limited resources.

Issues with timely compliance and return filing: The GST system in India requires businesses to file multiple returns. This becomes time-consuming and resource-intensive. Difficulties in meeting these deadlines, attracts penalties and legal complications. The frequent changes in GST rules and forms also add to the confusion, This makes it challenging for businesses to stay updated and compliant.

Managing tax disputes and audits: Under the GST dual regime, businesses are subject to scrutiny from both central and state tax authorities. This dual oversight increases the possibility of tax disputes and audits. Discrepancies in Input Tax Credit claims, misclassification of goods or services, and errors in return filing can trigger audits or disputes. To mitigate these risks, businesses need to maintain detailed records and may require professional assistance.

Mitigating Challenges Faced by SMEs

You can adopt several strategies to navigate the complexities of the GST’s dual tax regime and minimize their impact on business operations. Let us go through some of these strategies in detail.

Leveraging Technology and Automation

• Implement GST-compliant accounting software to streamline invoicing, tax calculations, and return filing processes.
• Adopt automated systems for Input Tax Credit reconciliation. This reduces errors and optimizes tax benefits under CGST and SGST.
• Invest in inventory management tools to track stock movements across state borders.

Seeking Professional Advice and Support

• Consult with GST specialists to understand specific GST implications for your business.
• Engage with chartered accountants for accurate financial planning and tax optimization strategies.
• Partner with financial institutions that offer specialized support such as those providing collateral-free business loans tailored to GST-related working capital needs.

Continuous Training and Education for Staff

• Conduct regular training sessions on GST compliance, focusing on CGST and SGST regulations.
• Encourage key staff members to attend workshops and seminars on GST updates and best practices.
• Develop internal resources and guidelines for handling common GST-related scenarios in your business.
• Consider online courses or certifications to enhance your team’s expertise in managing business under dual GST.

Conclusion

The implementation of the dual GST system in India has brought about significant changes in the way businesses operate. While this taxation structure has introduced complexities in compliance, cash flow management, and technological adaptation, it has also offered numerous benefits. Despite the challenges, SMEs can successfully navigate this tax regime by adopting various approaches. Leveraging technology and automation, seeking professional advice, and investing in continuous staff training are key to mitigating these challenges. While the transition may be challenging, the long-term benefits, like improved financial transparency and expanded market access, can contribute significantly to business growth. By implementing effective strategies, SMEs can turn the complexities into opportunities for business expansion and financial stability.

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