Though the wrangling over the Goods and Services Tax (GST) seems interminable, it is likely to become a law by June, 2016, setting into motion irrevocable tax reforms that will mark a paradigmatic shift in the Indian taxation system. In such a scenario, one of the industries most affected by it would be software companies providing business applications as a service to enterprises. Therefore, there will be far-reaching consequences for accounting software such as Enterprise Resource Planning (ERP), which is used by a number of corporates to generate invoices, inventory management, and payroll.
Generally, the smallest change in the taxation chain leads to a cascading effect, influencing the entire structure of tax accounting, from the top to the bottom. In such a context, one can very well imagine the sheer number of changes that would have to be made in ERP software to make clients tax compliant. The GST would basically necessitate the development of tax accounting systems from scratch.
Fundamental changes effected by GST
The GST would be a comprehensive indirect tax on manufacture, sale, and consumption of goods and services throughout India. It will replace taxes that the Central and State governments levy separately under different names. Thus, state-administered taxes such as Excise, VAT, Octroi, and Service Tax, will be replaced by a single unified tax across the country. Tax would be collected at each stage on the basis of the input tax credit method; this will allow registered businesses to claim tax credit to the value of GST that they paid on purchase of goods or services as part of their normal commercial activity. Under the proposals, goods and services are not distinguished from one another and therefore are not treated differently as far as taxes are concerned. A flat single rate will be levied in a supply chain till goods or services reach consumers. Tax would be split between the Center and states.
Leading market players building tax compliant ecosystems
With GST’s implementation looking imminent, leading market players have started designing modules to cater to the new requirements. They are creating multiple modules for input credit, destination system, twin rates, and exclusion. The ERP will also need to be synchronized with different supply chain models to support inventory supply management.
“The GST is basically a complete overhaul of the existing tax system. We must be ready for the transition. We want to help Indian enterprises make the transition painlessly. Our software will support the new compliance requirements,” said Shashank Dixit, CEO, Deskera—the leading ERP provider in the Asia-Pacific region.
Coping with fresh tax requirements may mean extra financial burden for enterprises who do not have updated software and may need to replace the old ones to make customers tax compliant.
“The transition may be difficult for companies using old systems, particularly, if companies that provided them with the software in the first place have shut down and they do not have the codes for development any more. In such a case, it be difficult to adapt the software to the changing times and move beyond Excise duty and VAT to GST. Such enterprises will have to go for new vendors, who have the codes and technology to deal with GST,” said Vinod Mehta, a software professional from New Delhi.
So, is GST the change that will define market leaders in the business software sector? Or will it be their nemesis? Nevertheless, enterprises and software developers will need clarity about several aspects of GST so that they are able to fine tune their products. And there is no time to do that like the present.