GST Tip – 244

As per the GST Return Formats, In table 5 of GSTR – 1, all inter-state outward supplies to B2C has to be shown here. Columns for Recipient’s State Code, Name of the Recipient, HSN Code, Classification of the line as the supply of Goods or Service and Tax paid on the Provisional basis.

GST Tip – 159

Every tax invoice issued by the taxpayer under GST should have HSN (Harmonized System Nomenclature) Code in the case of supply of goods and in the case of supply of services SAC (Services Accounting Code)

Impact on Enterprise Resource Planning – Transition to GST

Implementation of Goods and Service Tax in India is not a tax reform a but business reform, the way business has to be done under GST will undergo a sea change, and the company need not worry about the tax implications for setting up of new business or running the business. Business thrives well when there is business process under place. For running these business process, IT plays a vital role, and with the implementation of GST, there will be a complete transformation of the business process.  Implementing GST is not like the implementation of any tax like Education Cess, or Secondary Higher Education Cess or Swach Bharath Cess or Krishi Kalyan Cess. It requires a considerable amount of time and efforts to adopt the same else the market is lost to the competition.

Most of the organizations have implemented the Enterprise Resource Planning in their companies apart from the Supply Chain Management tool or Customer Relationship Management tools etc. to run the business efficiently and to take decisions on time. Implementation of GST wherever ERP’s are implemented is like re-implementation of ERP or up gradation from a lower release/version to higher release /version.

There is a lot of uncertainty in the implementation date of GST as well as the requirements under GST. Say, for example, software is defined as service in the Model GST Law released in June 2016 but the same brought in the dimension of ambiguity or confusion in the revised Model GST Law published in November 2016. Or in the treatment of free goods, in the previous law it defined as taxable, but in the revised, Model GST Law it is defined as non-taxable for the purpose of valuation under GST. With this level of changes, it will be challenging to design a solution by the ERP / accounting software vendors. So the first problem we see is, the software itself will not be ready completely due to the changing requirements, with this constraint the organizations are required to pre a roadmap and implement the same for running the business smoothly without any disruptions from the day one of the implementation of GST in India.

implementation-of-gst

Similarly, to the first time implementation of ERP in the organization, the same model can be adopted with some changes.  As the tax and regulatory requirements are still not in place fully, mapping the same in the same in the ERP will be a challenge. In this context, we need to have a plan factoring this also. The core group has to be reconstituted again with people having taxation as well as ERP knowledge.

As described in Figure 1, the core team has to be constituted, and they are expected to review the requirements under GST and conclude on the impact of the same on the Master Data and Transaction Processing. This amounts to a change of business process to a large extent. Say for example under the current Central Excise or Value Added Tax or Central Sales Tax there is no requirement to issue a tax invoice/receipt voucher for receipt of advance from the customer for the supply of goods but under GST the same is required. This also results in the changes the ERP / accounting software. Now the ERP should be having a provision to issue a tax invoice on the receipt of money from the customer and also to generate a tax invoice. The series for the tax invoice number can be different from the regular tax invoices. There should also be a provision to upload the tax invoice for receipt on the GST portal to generate reference number.

To implement these changes in the ERP, the requirements can be broadly categorized into four different categories, and they are

steps

Master Data

Master Data is critical to any transaction in the digital world be it in an ERP or an SCM for a CRM.  Master Data comprises the key data which is used on the transactions for it to be compliant as per the regulatory requirements in place from time to time.

For any ERP to functional efficiently from the day one of the GST rollout the following are to be in place

  1. Registration Number – the existing registration numbers will be replaced with new registration number called GSTIN, and it is state based. The registration number of the implementing company, the business stakeholders like the Customers, Suppliers, Bankers, etc. have to be captured in the system at the State Level.
  1. Tax Codes – Tax Codes – there will be a new set of tax codes to be defined for GST, and these codes are new once, and the same has to be supported by the ERP vendor. The tax codes required for GST are Central Goods and Service Tax (CGST), State Goods and Service Tax (SGST), Integrated Goods and Service Tax (IGST), Cess applicable on sin goods, luxury goods and on the aerated drinks, Tax Deducted at Source Tax Codes for CGST, SGST, IGST and not sure of the cess.

          Likewise, for the Tax Collected at Source for CGST, SGST, and IGST. These are the                     basic tax codes to be provided in the system by the ERP vendor and defined in the                   ERP.

master-data

          The codes should be defined separately for the reverse charge taxes, as they are                        required to be reported separately.

            The tax codes for goods and services can be defined separately as there are some                     reporting requirements specific to goods and services or if they can be flagged at the             transaction level to classify it is line relating to the supply of goods or services.

  1. Tax Rates – the ERP should provide provision to define tax rates for the tax above defined tax codes at the state level. This is required keeping in view of the following
  • In future, there may be bandwidth given to states to determine the tax rates
  • Based access control, users are given access to these data based on the state or location
  1. Chart of Accounts – new accounts have to be added to track and trace the recovery accounts, liability accounts, interim credit account, etc. for the tax codes mentioned above state wise. This makes reporting easy.
  1. HSN Code – all items have to be associated with the Harmonized System Nomenclature for all the taxes. Currently, HSN codes are known as Excise Tariff Codes, and the reporting under GST is based on HSN codes. Quantitate details are also required to be provided by HSN in the GST Returns. The Item Master data for each and every item must be defined with an HSN Code.
  1. SAC Code – Services accounting codes are associated with the supply of services, and they are similar to service categories in the current service tax regime. Reporting under GST is done at the transaction level, and this has to be captured at a master data level and defaulted on the transactions, most of the ERP’s do not have this feature currently for Indian Taxes. The same needed to be explained to the ERP vendors and ensured that the same is available in the product before the rollout of GST.
  1. Tax Defaulting – the defaulting in GST is based on the “Ship To” location, as GST is a destination-based taxation. Ensure with the ERP / accounting package vendor that the same is supported in the product else take up the same with them and get the same developed and released for testing much before the rollout of GST as it requires a lot of time for testing.

Transaction Data

1. There are no changes for creation and approval of purchase order/sales orders etc. and receipt of goods for the regular supply of goods or services or both. There are changes in the areas of tax invoice generation and issue and along with the processing of input tax credit.

2. Input Tax Credit – under GST, the input tax credit can be take only on the payment of taxes by the supplier and receipt of goods or services, and the buyer is in possession of the tax invoice. The input tax credit has to be processed based on the data given in the GSTN.

Under GST, the input tax credit can be taken only on the payment of taxes by the supplier and receipt of goods or services, and the buyer is in possession of the tax invoice. The input tax credit has to be processed based on the data given in the GSTN. A new process/session /form has to be provided by the ERP / accounting package vendor to avail in the input tax credit.

migration

There are also restrictions on the utilization of the input tax credit. These restrictions have to be built in the ERP or the accounting package.

Check with the ERP vendor for having a provision to avail input tax credit on the provisional basis, if the organization decides to avail input tax credit on the provisional basis. The organization has to take a decision for availing the input tax credit on payment of taxes by the supplier or provisional basis, and the users must be trained accordingly for processing the input tax credit.

3. Reversal of Input Tax Credit – there should be a provision in the system to reverse the input tax credit availed on inward supplies of services if the payment to the supplier is not made in 3 months. Similar provisions are there in the existing service tax.

4. Tax Invoice – as per the Model GST requirements, tax invoice has to be issued based on the “Time of Supply for Goods and Services.” Proper care should be taken at the time of transaction processing as there is no provision of tax invoice cancellation. The end users must be trained accordingly.

There is also only one document for communication between the buyer, seller, and tax authorities and that document is the tax invoice. In the current ERP’s, there are two different document numbers for the sales transactions, and this creates a lot of confusion and reconciliation issues. Proper care should be taken to educate the users about the same.

There is also a requirement as per the MGL to issue a tax invoice for the purchase of goods or services from the unregistered taxpayers and on the notified goods and services. Check with the ERP vendor if the provision for the same is provided, if not ensure to have the same in the system before the rollout of GST. This is a tricky requirement as the tax invoice has to be issued on the earliest of the following dates, date of receipt of goods /services or the date of accounting or date of payment. As it touches both the purchasing and inventory module along with the finance modules, it has to be developed properly and through testing has to be done.

For enabling the mobile check posts to authenticate the supply of goods, a reference number is required to be printed on the tax invoice. This reference number is obtained on uploading the tax invoice data in Jason file format on the GST portal. Check with your ERP vendor if the same is provided or not, if not get the same provided else it will be next to impossible to ship the goods without this reference number.

5. Reference Number for advance receipts – under GST, all the tax invoices or receipt vouchers issued under GST have to be uploaded on the GSTN during the month of receipt of the advance. The same has to be given as reference on the final invoice of supply of goods and services. Check with the ERP / accounting package vendor if the same is provided in the system if not ask for the tentative delivery of the same.

Reporting

The reporting requirements under GST are different from the current tax reporting. Transaction level reporting is the requirement under GST. The returns under GST have to filed per registration number.

There are three returns to be filed on a monthly basis and one annual return for regular taxpayers, and in the case of taxpayers who have works contract deductions, a separate return has to be filed on a monthly basis. In the case of service distributor, a separate return has to be filed on a monthly basis. Check with your ERP vendor if the same are being provided or not.

The returns under GST have to be filed through a GST Suvidha Provider(GSP), and there will be some nominal charges also. Before rollout of GST, engage with GSP and ensure that all the data required for the return filing is available in the system.

 

 

reportig

As reporting is very complex and data has to be provided in various groupings which will be next to impossible to generate such reports in any ERP / accounting software. To file the returns, ensure that two primary reports, one for inward supplies and another for outward supplies are provided in the system.  The file format of the reports can be in xls or any other format which is user-friendly.  The data file generated in the respective format has to be mapped one time with the format given by the GSP. The GSP then process the data and submits it to the GST servers for validation of the returns. This mapping is a one-time activity, but the filing of return is a monthly basis, so ensure that all period close is done in the ERP as per process and then only data is generated.

Migration

  1. Data Migration

The next crucial step is migration. Though data is available in the ERP system but still migration is required for the open purchase/sales orders etc.  These documents are created with Excise / VAT / Service Tax but when the receipt or shipment is taken post-rollout of GST, the taxes will be as per GST. Check with your ERP / application vendor that the migration of open documents will be done automatically or to be done manually. Based on the reply, make provisions in the system and then plan the activity

On the accounting date I.e. on the date of the rollout of GST, there will be some receipts which have been made but not accounted, ensure that there are no such cases and input tax credit is taken. If not then the same is not part of the returns before the accounting date and not in the closing balance, as a result, the same cannot be carried forward to GST as opening balance of input tax credit. This would have a great impact on the cash flows and working capital.  Ensure that there are no receipts pending for accounting at least two or three days before the accounting date.

  1. Operations

Another important thing is to plan your procurement accordingly, ensure that there are no goods in transit on the accounting date, else it will be tough to manage the same and if there are any such cases account the same immediately, expedite the QA process and pass on the documents to finance.

Check if all the existing balance of taxes are eligible to be carried forward to GST regime as opening balance, if not try to utilize the same before the rollout of GST so that the same is not reflected in the P & L as an expense, thereby straining the bottom line.

Minimize or stop all the incoming at least two to three weeks before the accounting date, so that there are no migration transactions. For this plan the procurement accordingly. Similarly, on the outbound side also, ensure that the shipments are minimized or stopped before at least one week before the accounting date or ensure that the goods reach the customers’ place before the accounting date and he completes all the accounting activities before the rollout date.

  1. Training

For successful migration to GST and smooth transition, engage all the stakeholders from the beginning. Train the vendors and customers who are in the medium and small segment as they do not have the required infrastructure and resources. Train them and have change management sessions so that you will not have any surprises after rollout. The reason is, the returns under GST will be validated only if the buyer and seller record matches else it will be treated as invalid returns. This will have an impact on the compliance rating. If the compliance rating is reduced, it will have a negative impact on the sales and this will impact the bottom lines.

Training is also required to be provided to the end users, as they are the owners and run the system on a day to day basis. Training has to be provided for them on the GST point of view, from the systems point of view and also from the business point of view. If there is any GAP in any of these three points, then a lot of challenges will be there after rollout.

  1. Working Capital Assessment

Have a provision for one of the most scarce resources called cash as the input tax credit under GST will be available on payment of taxes that means there is a time lag in the availing the input tax credit. Ensure to have additional working capital requirements in the form of owners funds infusion or enhanced working capital limits. Increasing the working capital limits is not an overnight job, it has to be planned and executed at least two or three months earlier, as it requires board approvals from the organization and banks.

The cash flows statements have to be reworked and a conservative approach must be taken for the initial period, as the sales may take a hit on account of migration to new system, and provision for input tax credit has to be made as input tax credit under GST is not available on receipt of goods like in current central excise.

  1. Re-engineering Business Process

The business process has to be re-engineered to adapt to the changes to the GST regulations. Say for example in GST, if there are any shortages or rejection of goods, the credit note has to be issued by the supplier only and not by the recipient. This means the existing practice of creating the invoice for the purchases for the net amount only has to be changed.  There are many such business processes which are required to be evaluated in detail and changed to meet the requirements under GST.

The core team has first to evaluate all the existing business process and then see the impact of each business process under GST and make an assessment. If there are any changes to the business process, the same has to discussed with the senior/top management and take their concurrence for the changes. Once this activity is completed, the same had to be updated in the standard operating procedures and explained to the users. The changes required are to be evaluated in the ERP and seen if the same is supported or not, if no then the same has to be discussed with the ERP vendors to provide the same.

  1. Post go live support

Once the users are trained and on the accounting date, the GST is rolled out, there will be some unforeseen issues arising due to last minute changes in the rules or understanding or for any other reason, in such cases there should a core team in place to evaluate the same and suggest the next course of action, this ensures smooth running of the business.

There can be some user mistakes also due to new requirements from the compliance perspective, changes in the ERP, new business process, etc. to rectify the errors, there should be a 24X7 support team to tide over such mistakes.

Implementation of Goods and Service Tax is not the implementation of tax reform but a business process change. The same is evident from the above lines; the above things are described at a high level for generic business process and the same may change from organization to organization and based on the nature of the industry.

 

Disclaimer

Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

 

GST Tip – 92

In GSTR – 1, all the supplies made to B2C ( Business to consumer) less than Rs 2.5 lacs in the month, for both Intra-state supplies and inter state supplies have to be shown in table 7 by HSN / SAC Code. The tax invoice number or customer name is not required to be shown in the return.

GST Tip – 89

In GSTR -1, transaction level detail with the invoice number has to be shown in case of all B2B transactions, B2C transactions with invoice value above Rs 2.5 Lacs for supplies to customers outside the state and in case of B2C transactions for supplies within the state or outside the state (less than Rs 2.5 Lacs) summary by HSN / SAC has to be shown along with the tax rates and amounts.

GST Tip – 87

In GSTR – 1 Harmonized System of Nomenclature for goods (HSN) should be shown mandatorily for exports. HSN is not mandatory for taxable person whose aggregate turnover is less than 1.5 crores. HSN shall be restricted to maximum 8 digits. If gross turnover in the previous financial year is greater than Rs 5 crore, HSN should be a minimum of 4 digits. If gross turnover in the previous financial year is equal to or greater than Rs 1.5 crore and less than Rs 5 crores, HSN should be a minimum of 2 digits and would be mandatory from the second year of GST implementation.

Demystifying Invoicing Under Model GST Law

Invoice is a document between the buyer and seller which confirms the sale / purchase of goods or services along with the details like item or nature of service, cost per unit, if any applicable taxes on the transaction, any incidental charges like freight, packing charges, etc., apart from the buyer and seller details. Invoice is to be serially numbered for tracking and reference purpose. If the transaction is being taken for a taxable good or service, then the invoice becomes a tax invoice. The tax invoice apart from having the above-mentioned details, it will also have the tax registration number of the buyer and seller along with the address under which jurisdiction the buyer and seller falls.

In the current tax regime in India we have the following invoices which are considered as tax invoice from taxation perspective Excise Invoice, VAT Invoice & Service Tax Invoice. All these invoices are also required to be numbered serially and the tax payer has to  inform the tax authorities the tax invoice numbering sequence being followed for the financial year.

Under GST also there is a requirement to issue tax invoice as per section 23 of the Model GST Law at the time of supply of goods or services as per Section 12 and Section 13 of the Model GST Law. Section 23 of the Model GST Law prescribes the information to be shown on the tax invoice in case of supply of goods

  • Description of the goods
  • Quantity of the goods being sold
  • Value of the goods being sold
  • CGST / SGST or IGST levied on the goods
  • And any other information as requested

The following information is to be shown in case of supply of services

  • Description of the service
  • Value of the service
  • CGST / SGST or IGST levied on the goods
  • And any other information as requested

If we dissect the Section 15 of the model GST Law (value of taxable supply) it says that all the amounts being collected or reimbursed from the buyer has to be included in the valuation of the taxable supply of goods / services. This means that all charges related to the transaction directly or indirectly have to be shown on the tax invoice. The charges or reimbursable expenditure on which the tax have to be levied are freight, insurance, packing charges, loading charges, unloading charges, special / specific charges being levied, subsidies if any, royalties or any other incidental charges have to be included in the tax base and these amounts are being paid by the buyer to the seller or being reimbursed by the buyer to pay to third parties.

THE JOINT COMMITTEE ON BUSINESS PROCESS FOR GST on Returns has given the tentative formats of the Returns to be filed under GST Regime once rolled out. If we review the GSTR 1 Report, monthly outward supplies report to be filed by the tax payer has the following information

  • GSTIN / UIN
  • Invoice – Number, Date, Value, HSN/SAC, Taxable Value
  • Tax Rate and Amounts – CGST / SGST / IGST
  • State of the buyer
  • Reverse Charge applicable for the transaction

Though the reports to be filed under GST are not yet notified, on interpreting the information given in the Model GST Law and the Business Process Reports for Returns we can conclude that the following information is to be shown on the tax invoice else reporting will become complex

  • Description of the goods / service
  • Quantity of the goods being sold – applicable only in case of supply of goods
  • Value of the goods / services
  • CGST / SGST or IGST levied on the goods
  • GSTIN / UIN
  • Invoice – Number, Date, Value, HSN/SAC, Taxable Value
  • Tax Rate and Amounts – CGST / SGST / IGST
  • State of the buyer
  • Reverse Charge applicable for the transaction
  • Free goods if any issued

We can also conclude that if goods or services being supplied are applicable or eligible under reverse charge, the same needs to be shown on the tax invoice stating that tax applicable is under the reverse charge and the tax amount should not be included in the invoice total. This is similar to the existing service tax provision for invoicing under reverse charge.

As per the valuation rules, if goods are being issued as sample or freebie on the purchase of any other goods, then GST has to be levied on such free good or freebie. It will be a business decision to collect the tax from the customer or absorb it as business expenditure. This is not applicable under VAT currently not it is getting extend to SGST or IGST under the new tax regime.

As per the Model GST Law, post to issue of a tax invoice for supply of goods or services, if there is any change in the price of goods / service or tax rates, a debit memo or credit memo can be issued for such cases and the debit / credit memo should have the reference of the original tax invoice. In GSTR – 1, the debit / credit memos have to be reported under table / section 8.

In case if the tax payer is supplying both taxable goods / services along with non-taxable goods / services, a separate bill has to be issued. This is similar to the existing VAT provisions where a non-vatable invoice has to be issued for sale of non-vatable goods. Now the same is getting extend to CGST and IGST under GST regime.

As in the current excise or VAT requirements there will not be likely a format being suggested by the GST Council and the tax payers can issue tax invoice based on their business need but have to ensure that all the required information is shown / printed on the tax invoice being issued under section 23 of the Model GST Law.

Malaysia which has implemented GST from 1st April 2015 have suggested some invoice formats also. It has also recommended that simplified tax invoice can be issued and on which input tax credit can be availed if the tax amount is not exceeding RM 30. As per Malaysian GST, under specific conditions simplified tax invoice can be issued and such invoices need not show the buyer details like in the case of regular tax invoice. In India, we do not see any such provisions as the Model GST Law has made it clear that input tax credit can be availed on supplier payment of GST Liability.

Some of the common issues which the trade and industry may face with rollout of GST on the Tax invoice front are

  1. Free Samples – as per the Model GST Law, the tax has to be levied on free samples also, this may impact the pharmaceutical industry where samples are given to Physicians for promotion. Now going forward GST has to be paid before the issue of samples. The pharmaceutical industry may have to absorb the same that means it impact their profitability. Same in case of consumer goods also where freebies are given on merchandise.
  2. Loading Charges – will there be a separate Service Accounting Code for loading and unloading charges, which are collected from the buyer. This is applicable in case of commodities like iron, steel, aluminum etc
  3. Insurance Charges – in some case where the goods are transported are high value, insurance is also part of such contracts / sales. The insurance charges may be collected from the recipient or the tax payer may pay himself. Whatever may be the case, does the tax payer has to levy GST on the insurance premium and also mention in his registration form “Insurance” also as his business?
  4. Packing charges – in some cases, the customers may ask for special packing based on their business requirements, in such cases also GST is to be levied on packing charges. As such packing charges may not be having a separate HSN code in few cases like material being shipped in gunny bags / jute bags, in such cases what will be the HSN code?

Another change from the existing business process

  1. In the case of purchase of goods or services from non-registred tax payers, the reverse charge is applicable and basing on the rules provided in Model GST Law, the time of supply for the reverse charge is either accounting or creation of receipt or payment of supplier whichever is earlier. At this point, a tax invoice is also required to be issued. Currently the same is not required in the Service Tax.
  2. In the draft rules it is clearly mentioned that separate invoice has to be issued for non-gst supply of goods or services individually if the transaction amount is less than Rs 100 or at the end of the month a consolidated document to be issued called bill of supply for all the transactions where bill of supply has been not issued during the day.
  3. The existing invoice number series has to be modified as the draft rules talks about only invoice series being alphabetical or numeric
  4. There is also a requirement to print the reference number generated from the common portal on the tax invoice
  5. There is no concept of tax invoice being cancelled under GST once issued, in case if there is a need for such a case, then taxpayer has to issue a debit or credit memo.

At this point of time we may not have the full information on the Tax Invoice under GST, but we have an overview of the same based on that we need to do critical analysis of the business and come out of open issues where clarity is required and make representations to the concerned authorities to avoid last minute surprises, which may impact the continuity of business when GST is rolled out.

From the Model GST Law and the Business Process Reports on Returns, it is clear that government wants to track each and every transaction and avoid possible revenue leakages. A silver lining for the trade and industry is that the Model GST Law has clearly stated that input tax credit can be claimed on the debit / credit memos also.

Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.