If you sell products or services to businesses in other states, the new GST system changes how you collect sales tax. Of course, there are also changes if you buy goods or services across state lines. The updates include new taxation rules and extra reporting requirements, but they also usher in input credits and eliminate checkpoints. Here’s a look at how things worked in the old system compared to the new regime.
In the past when you sold goods to a business in another state, you had to pay central sales tax to the central government from the state where the transaction took place. On top of that, you may also have paid additional excise and sales taxes. Under the new regime, you pay interstate GST in the place where the goods are supplied. For instance, if you’re based in Indore and supply a shipment of goods to a business in Bhopal, the IGST applies in Bhopal.
Under the old system, many businesses felt pressured into setting up warehouses or production facilities in every state. By having a presence in multiple states, they were able to avoid the expense of the sales taxes associated with interstate transactions. But that was a massive financial and logistical burden for most companies. The new system changes that. Because the IGST is only assessed at the point of sale, you can feel free to set up shop nearly anywhere, and you don’t have to worry about an undue tax burden when selling to out-of-state clients.
Providing Services Across State Lines
The new rules also affect people who supply services. In the past, the service tax applied if you were selling services to another business across state lines. Now, the GST applies to these transactions. Similar to transactions involving goods, the GST also applies at the point of supply. In other words, the location of the business receiving the service dictates the tax. With the new system, there’s also no minimum threshold for registration. If you provide services on an interstate basis, you have to register your business.
Crossing the Border
For many businesses, one of the best parts of the new GST system is that it eliminates border checkpoints. Under the old system, interstate shipments had to be manually checked before they crossed a state border. That often meant waits between 10 and 12 hours for most trucks, which delayed shipments and wasted petrol due to idling. If you hired the truck driver, it also meant spending more on payroll just to have an employee waiting in line.
When you’re sending goods to clients under the new system, you don’t have to worry about those delays. The new GST rules replace border checkpoints with e-way bills and spot checks. An e-way bill is basically an electronic invoice that travels with the goods. It contains information about the seller, the buyer, the value, and any GST related to the shipment. Businesses generate these bills electronically using the government’s portal. Government officials can stop trucks and ask to see a copy of the e-way bill, but again, there’s no queueing at the border. Generally, you only need an e-way bill if the value of the goods is worth over ₹50,000, but if you’re shipping handicrafts or goods for job-work purposes, you have to create an e-way bill, even if the value of the goods is below that threshold.
Under the old system, you couldn’t claim input credits if you paid central sales tax on an interstate purchase. Instead, you had to pass the tax onto your customers when you resold the good. That drove up the prices on goods that were purchased interstate and made it challenging to compete with local businesses. Under the new system, that cascading effect is gone, and you can claim an input tax credit for any taxes you pay.
To explain these concepts, imagine you purchased goods from a business in another state under the old system. The goods were ₹100, and you paid ₹20 in tax. Then, you modified the goods so you could sell them. Say you bought fabric and turned it into trousers. At this point, you took the ₹100 cost plus the ₹20 tax and added another ₹100 for your time. That brought the goods to a total price of ₹220, and you assessed tax on that amount before selling to your customer.
Under the new system, you still pay tax to the business that sold you the fabric, and you still assess tax to the person who bought the trousers. But when you file your GST return, you get to claim the tax you paid as an input credit against the tax you assessed. If you paid ₹20 in tax and then assessed ₹30, you only owe ₹10 to the government.
In some ways, the reporting requirements increase under the new system. Most businesses have to file three monthly reports. The first report details the GST you assessed and collected. The second includes all the GST you paid and your input credits. The third monthly report subtracts your input credits from the amount you collected to give you the total amount due. In contrast, under the old system, you only had to file once a year.
That said, the GST Council is working on making the forms shorter and easier under the new system. As of late April 2018, the new form has not been finalised, but ultimately, it should be a single-page form. Additionally, if your business doesn’t do that many sales, you may quality to submit GST reports every quarter.
The new GST system can be confusing, and to ensure you stay compliant, you need the right help. QuickBooks accounting software can help you generate GST-compliant invoices and track all your accounting details. It handles the numbers so you can focus on making your business a success.