Are enterprise software providers ready for India's GST regime?

India has become the latest country in the worldwide list of over 160 countries that have implemented the Goods & Services Tax (GST) system. While the Indian Parliament has passed the Bill to amend the Constitution Law to pave way for the new tax regime, it is likely to come in to force from April 2017 only. The new system while is being hailed by industry bodies and is expected to plug in loopholes that lead to tax-theft, it brings in new set of challenges, as all tax filing is expected to be digitized. Are company systems and software ready for the challenges, which seem to be multifold?

The complex federal structure

The biggest challenge that even India’s premier industry body — Nasscom — that represents and sets the tone for public policy for the software industry in the country, has raised stems from India’s federal structure. India consists of 29 states and seven Union Territories and the central government. All the 29 states have their own governments and state laws. The Union Territories, meanwhile are governed by the central government. Consistent with the federal structure of the country, the GST will have two components: one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States (hereinafter referred to as State GST). This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be uniform across these statutes as far as practicable. The Central GST and State GST are to be paid to the accounts of the Center and the States separately. Raising the concern, Nasscom, said in an official release, “Companies engaged in the supply of services on a pan-India basis, will have to seek registrations in 37 jurisdictions (29 States + 7 Union Territories with legislature + Central Government).” The SGST too is not expected to be uniform across the 37 jurisdictions. The release further raises the concern:

• Place of supply provisions may require multiple invoicing for services delivered under single contract if services are delivered from various offices/ centers of the same entity.
• Valuation of services can potentially lead to disputes and litigations, leading to Transfer pricing like situation for intra company supplies and will necessarily require refunds.
• Export competitiveness of the IT sector could be impacted due to
  • Complex billing and invoicing requirements due to place of supply and valuation.
  • Reverse charge of GST on import of services used as input for services that are exported, can lead to locking in working capital.
  • For SEZ units, which were permitted upfront exemptions, there is now no provision for upfront exemptions, and it will necessarily require application for refunds.
• The provision mandating “tax collection at source” for transactions on third party ecommerce market place are discriminatory and can potentially render such ecommerce marketplace unviable. Moreover, this is likely to negate the beneficial impact of e-commerce on hundred thousands of small businesses in the country by compelling them to seek refunds compounding their working capital problems.

Who and what will get affected? All these changes will seep into and reflect in the enterprise software businesses are using. ERPs and accounting software will need to be rewritten, which will differ from state to state and then pool into the central GST software, dubbed as Goods and Services Tax Network (GSTN) that is being built by Infosys, a Bangalore based IT company, at an estimated cost of US$ 207 million. GSTN will allow businesses to register using their PAN (a financial ‘Permanent Account Number’ mandatory for individuals and businesses to track monetary movement and filing taxes) and mobile number or Aadhaar (India’s Unique Identification Number). All businesses will be given a GST identification number, which will be a 15-digit code, consisting of their state code and ten digit PAN. The key software players in India that could stand to get affected from these changes include Tally, SAP, Deskera, IBM, Salesforce and QuickBooks. They will need to bring in all together these changes, rewrite a major part of the software, besides of course training their employees, which extends to both the client and the consultant. Not to mention that it requires a considerable amount of investment too. The risk of data loss during migration to new systems too looms large. The customization may particularly be difficult for companies using old systems with obsolete language, coding, or worse, when the company that had developed it, has shut down. That will incur extra charges for new developers and vendors to get an updated software. The changes are not limited to just the Finance & Accounting departments. It will have reaching impact on almost all the aspects of the enterprise operations in the country, for instance, pricing of products and services; supply chain optimization; IT, accounting and tax compliance systems.

Are the software providers ready?

Abhishek Gurjar, Manager, Data Quality, HSBC Bank, Bangalore, tells from his past experience while working as a consultant for various multi-national companies where he oversaw the implementation of SAP systems. “The taxation in SAP FICO (Financial Accounting Controlling) were a nightmare for the IT professionals as the software required to have a provision for 19 different taxes and that too different for every state ! There were immense permutation and combination for taxes, which were required to enter into the system. If not entered properly, it would have a big compliance and regulatory risk.” He though states that “this entire hassle would be a thing of the past” for SAP, but feels that other software like Tally, PeopleSoft would be affected in a similar way. Bharat Goenka, Managing Director, Tally Solutions, sounding the “danger bells” in an open letter, feels that “In one fell swoop, a swathe of businesses is staring at their (sic) death knell as instead of being the promising vehicle for growth, GST has the potential to destabilize all that is good.”

“The most critical cause of failure of GST will be in the transference of responsibility and liability of tax remittance to the customers of a supplier. Basically, the law postulates that if a particular supplier has failed to comply with the law correctly by furnishing the correct returns and/or making the correct payment then its’ customers cannot avail the input credit, and if given, it will be reverse.”

The problem, Goenka feels is not the ‘management of a manifest risk’, but the side-effects of cash flow, improper accounting, and reduced ability for people to trade with new suppliers and new customers, since there is uncertainty about the business outcome. These all things need to be factored in while rewriting the software. As said earlier, SGST too is not expected to be uniform across the 37 jurisdictions. Brajesh Sachan, Product and Technology Head, Deskera Open Source, raises the issue of managing the volume of data that will need to be dealt with — expect over billion invoices to be generated in a country consisting of a population of over 1.25 billion. “While, it might bring ease to an otherwise complicated tax structure, it is difficult to assess the integration of software with the technology platform (GSTN) that will be provided by the government. There could be protocols and red tape which may cost Indian enterprises a lot of time,” Sachan adds. Having said that Sachan states that Singapore headquartered Deskera, in fact, is the first enterprise software suite to be GST compliant in India. “Deskera is the leader in enterprise software in Asia, and is popular amongst the SME sector, particularly in Southeast Asia, where most of the countries — Indonesia, Singapore, the Philippines, Thailand — are already following the GST system. Malaysia being the latest country to move to the system in 2015. We have a deep hands-on experience while partnering with various government departments and businesses in Malaysia transitioning them to GST. We are ready for India too, and just have to feed in the rates when they come in,” says Sachan.

What lies ahead?

Even though cloud adoption and Internet of the connected world (IoT) is still in its nascent stage in India, users and customers seem to flock to businesses that offer and support ‘Plug and Play’ environment. So computing tax slabs can be very difficult if the certified GST software doesn’t support the same and call in for additional hardware installations. It concerns the SMEs the most as majority do not have have any IT infrastructure at the front-end. The retailers are out looking for consultants and advisors to understand the possible impact and make the necessary changes, based on their manufacturing location, size, and warehousing and current enterprise resource planning (ERP) systems. Amidst all this, arriving at a consensus on the Model GST Bill is likely to take some time. While the governments bicker about logjams, enterprises have some time to put together an IT team and GST compliant software service to survive, which looks like a major upheaval in the business software sector. Both in technological and financial terms.