Today I got many answers to my questions about Indian GST / VAT (Value added tax) after talking with a Company Secretary (henceforth termed CS) professional. Read on if you are interested to know more. GST - Goods and services tax, VAT - Value added tax and both are essentially the same with the same intention. Most countries call it VAT and India calls it GST.
1. Earlier I had always thought how even big vendors in India ask customers if they want to pay in cash to avoid GST. After I was asked by an electric cable vendor in Pune if I want to pay in cash for a bill of thousands of Rs of electric cable. The CS told me, they essentially buy also in cash to avoid taxes from their own suppliers, and they do the tricks to save on the taxes in the entire supply chain. So a lot of people do this in India at the merchant level thereby defeating the purpose of GST.
2. India has really problematic implementation of GST and its very complicated, thereby further making more people avoid that, and I feel, if the implementation was simpler many people would not avoid GST at the merchant level and the income for government would be higher.
3. In a country like Netherlands, the GST you pay when you buy some thing, and when you sell some thing are treated separately. For e.g. if I purchase 100 Rs worth item and pay 18% GST, I pay the vendor 118 Rs and the vendor pays it to the Govt when he files for his return say per month (In Netherlands per 3 months). While when I file my GST return per month (In Netherlands per 3 months), I get that money back in account immediately in the next month of filing. So I get 18 Rs back in account immediately and the Govt does not hold up that money with themselves and returns it. 3. If I sold that item further for say 150 Rs, and charge 18% GST / VAT on that, then 150+(150*18/100) = 177 Rs is the price I charge to my customer and 150*18/100 = 27 Rs is the GST I charge and then I pay the govt 27-18= 9 Rs, which is the Value I added in the process of selling which is what GST / VAT (Value added Tax) essentially supposed to work. So I paid to my vendor 18 in GST, and charged 27 Rs in GST from my client, and added a value of 9 Rs, which is the tax Govt gets on my value addition, because its VAT or GST and not sales tax. The tax is on value addition and not sale price. See below how it works in India.
4. In India instead of returning back the money I paid to govt, this 18 Rs is given to me as a credit, that I do not get back unless I sell some thing and charge that GST to my customer. So imagine If I buy some thing worth 100 Rs, and pay 18 Rs GST on it, then the total invoice cost is 118 Rs, so this 18 Rs that I already paid earlier to the govt is not returned back to me, unless I sell it in some time and charge my customer for that. So my 18 Rs is hold up with the government. So until I sell the item further, I am paying a sales tax to the govt and it works as Sales tax and not VAT or GST.
5. Now imagine this for hardware inventory of materials and what problem it creates in cashflow of companies especially startups. Imagine you are purchasing an hardware inventory from your suppliers worth 1 Lakh Rs, then you pay 18K RS GST and you pay 1,18,000 Rs as invoice to your vendor. Now I will not get this 18k Rs back unless I have managed to sell my entire inventory, in the coming months and show I have created a value. So the govt is sitting on my 18K Rs, and now if you are a hardware business that has lots of inventory you need to pay lots of GST worth lakhs of Rs in the worst case, and this money is not going to be returned to you unless you manage to sell all that inventory to your customers only when it gets offset because the govt only gives you that credit. This is really bad for startups because the govt is holding up the cashflow with them in terms of GST collected.
6. Consider the GST you pay on office rents, under the Indian govt GST laws you can not get the GST you paid back, unless you manage to sell enough to your customers where you can offset that GST on office rent or any office furniture or anything against actual sales you do. So any kind of GST you pay to your vendors, services, can only be obtained back by selling even more higher amount at much higher prices, because to recover back your GST tax on office rents or other items you need to charge lots of money for your product further making it more expensive to be able to get more GST from client. So while a product is being built, all the expenses you are doing, on services, and inventory, furniture, etc. and the GST you are paying on it, you can never get it back unless you start selling in the future. Many companies do not sell any thing and die and they just lose all the money and it lands up with the Government.
7. Now the above scenario is for local selling within India. If you are going to export from India (the end client does not pay GST), the beauracracy that you have to go through to show that you are exporting a product is lots of paperwork and requires lots of supporting document, and only when you show that, you get the equivalent money back from the government in cash. For e.g. if you are an export only unit of hardware then you are paying GST on your purchase, but because you are exporting the clients are not paying local GST, so only in this case after lots of paperwork the govt gives you full cash in return that you paid for your GST to your vendors. If you are business that does local selling and also exports, the laws get even more complicated. You also need an import / export number and documents etc. further in addition.
8. On top of that there is state GST, federal GST, interstate GST and different aspects of filing on those things and you need to file it per month, so more paper work and compliances.
9. On top of that you have some 5 tax rate slabs under which different goods fall into, while most fall into 18% GST slab, some fall in lower and higher up-to 28% slab.
10. Now, compare this to countries like Netherlands where exporting, importing, getting GST return back is so easy, and does not require any paperwork, extra scrutiny and many other factors, the ease of doing business and operations becomes super easy. The govt does not hold up your GST and you get it back immediately irrespective of if you sold the inventory or not. That means if I paid 18K Rs GST on 1Lakh Rs worth of purchase to my vendors making the total bill of 1,18,000 Rs. Even if I do not sell that inventory for the next years, I will get the 18K Rs back immediately the next month I file my quarterly GST return, in bank account. So the Govt makes it super easy. In the Indian context if a hardware company that is launching new products puts in lots of inventory in the hope to sell, the GST they paid to the govt stays with the govt for years, and only GST credit is given to them, unless the inventory is not sold, and in this time if the startup dies because the product fails, all the GST you paid goes to the govt. This is death for startups which are severely cash crunched always as their money is held up by the government always and if they fail they suffer even more loss further and the GST becomes the sales tax ultimately.
GST / VAT is basically a Value added Tax and the tax is charged only on the Value addition that is done by each business. In the Indian govt context, it is being used as a Sales tax in the extreme case when the business runs in losses, does not have enough revenue, etc and product fails, because the govt holds up the tax for infinite time if the inventory does not get sold. If the business does not add value it should not be liable for a tax, and the moment it adds value it pays the tax (which happens when the product is sold), otherwise it acts as a sales tax, which is happening in the current Indian context I believe. This prevents lots of businesses to start in India as if they fail, their cash is lost to government.
This is also the reason I feel, lots of people are defaulting on GST because a lot of tax is being hold by the Govt and this affects the cash flow of many businesses when you are doing big transactions, and have lots of hardware inventory like wires, cables etc. which might stay unsold for reasonable time. And I have a feeling this is leading to further corruption because then these businesses are doing transactions in cash with their own suppliers by doing some setting further.
In the end Govt is making things more complicated by adding more complicated compliances and making things difficult for every one, than simplifying things further. This is why many businesses / investors do not want to invest in India and want to invest in the parent company outside India and have a subsidiary in India due to ease of doing businesses and compliances. The same horrors apply to closing of businesses where you have to take approvals of many many entities which again complicates things.
This is a summary of how complicated Indian GST laws are and make things so difficult in terms of various things after a detailed discussion with a professional Company Secretary / Accountant. This need not have been so complicated and could have been implemented with much more ease and to help get even more taxes and make it easy to start more businesses in India and also let them fail.