Before GST, your company’s record-keeping started and ended with you. You were responsible for reporting your sales accurately and for paying the correct amount of tax. With GST, this has changed considerably.
Now, your records are compared with the records of your vendors and your customers, and what’s more, they all need to match. While this is a great way to prevent tax fraud, it may affect how you choose vendors.
How Do Transactions Work Under GST?
When your business buys products or services from GST-registered vendors, you pay tax on the purchase price. Your company then uses those supplies to do business. When you go to sell your own products or services, you must charge GST to your customers. Each month, you report these transactions and pay the amount of GST you charged customers to the government.
Chances are, many of your purchases qualify for the input tax credit. This credit covers the things you use to run your business, including computers, office supplies, and raw materials. Each month, you can add up the GST you paid on qualified purchases and subtract that number from the GST you owe to the government. Using the ITC helps make sure the same products aren’t being taxed multiple times.
How Does the Government Track ITC and GST?
When you file your GST returns each month, you must provide your invoices, as well as your ITC and GST amounts. Your vendors and customers do the same. Then, the government uses its electronic GST system to compare all of these transactions and make sure the numbers match.
If your vendors aren’t reporting accurately, it could cause problems for your company.
What Happens When Vendors Are Not GST-Registered?
Not all businesses in India need to register for GST. In most cases, this applies to very small companies. When you buy supplies from these vendors, your GST responsibilities change. Instead of relying on them to pay GST, you become responsible for the tax. Rather than paying it as part of the sale price to the vendor, you must report and pay it to the government. The next month, you can claim this tax as ITC, but it requires you to have more cash on hand initially. Depending on your company’s cash flow, this could give you pause when working with unregistered vendors.
What if Your Vendors Don’t Pay Their GST?
As a business, you’re part of a supply chain, a line of businesses that’s involved in creating a product or service and selling it to end consumers. The ITC flows through this chain. If you’re claiming ITC on taxes you paid to a vendor, you don’t get that credit until the vendor actually pays those taxes to the government.
The real problem lies in the delay. Because of the GST filing schedule, you wouldn’t find out your vendor defaulted on GST for two months. At that point, the government would reverse the vendor’s credit. Then, since you claimed a credit that’s been reversed, you’d have to pay that amount to the government. This can put a strain on your cash flow.
To make matters worse, if you continued to do business with the vendor and claimed ITC in the two months, you might have an even higher tax liability. If your business doesn’t have enough of a surplus, these unexpected taxes could cause serious problems. If you’re late on your payments, or if you default, it can affect your compliance rating. This could make your customers hesitant to buy from you, which could reduce your profits.
How to Keep Your Business Safe
Since your business is so closely linked to suppliers under the GST regime, it’s very important to be selective about who you work with. When you go to choose new vendors, it’s a good idea to check their GST compliance rating. This score reflects the company’s past performance. A bad rating can indicate the company has:
- Filed tax returns late
- Been late on tax payments
- Defaulted on taxes
- Refused to cooperate with tax authorities
- Failed to reconcile tax problems quickly
These are all red flags for your company, which makes the compliance rating one of your most useful tools. If a company has a high rating, it’s probably a safer choice than a business with a lower rating.
Another way to pick vendors is to talk to your professional contacts. If a company has experienced problems with a supplier, it’s usually willing to share that information. You can also ask potential vendors for references from past clients.
Of course, there’s no way to be 100% certain about every supplier. To protect your company in case a vendor defaults, it’s a good idea to keep a positive balance of credit in your business. That way, you can cover unexpected tax payments and keep your compliance rating high.
Over time, you can build trusting supplier relationships that create a solid supply chain for your business. But in the short term, screening new vendors and keeping tabs on their GST status can help you maintain a profitable business as the country settles in to the new tax regime.