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GST: Big opportunity with trouble of sorts

GST has left many gasping for relief in the IT channel fraternity. With over a month of its implementation, we take a deep dive to find out the opportunities and challenges from GST

By Amit Singh

The Goods and Services Tax (GST) is probably the biggest indirect tax reform India has seen. The new paradigm is expected to rein in improved tax compliance and facilitate the ease of doing business.

Marthesh Nagendra, Netgear 2
Marthesh Nagendra, Country Manager, India and Saarc, Netgear

“GST will replace 17 indirect taxes and will enable compliance costs fall over the time. With ‘One Nation, One Tax’ regime, India has become a single market which will offer easy flow of goods across the country. Moreover, ‘Make in India’ products will become cheaper with input tax credit, which will make manufacturing in India more competitive,” says Marthesh Nagendra, Country Manager, India and Saarc, Netgear.

Rs 6000 crore opportunity

For solution providers, GST brings a large opportunity. Notably, GST returns have to be filed on a monthly basis, which requires robust accounting software that can enable error free filings.

Developing ERP packages that help SMEs record GST transactions is a big opportunity to start with. Moreover, there are many one-time opportunities like upgrading the ERP systems and IT applications so that they are compliant with the GST.

Further, according to market estimates, there are 51 million small businesses in India but only about 20 percent are digitally enabled. With GST, more small businesses will go digital, which will increase demand for IT infrastructure including ERP and PCs.

“As automation is to play a vital role in GST, it would necessitate improvisation of IT infrastructure leading to increased demand for IT products and services. Still many SMEs are struggling to become GST compliant, which is a big opportunity,” says VK Bhandari, CMD, Supertron Electronics.

Sandeep Sharma, IDC - 2
Sandeep Sharma, Research Manager, IDC

Sandeep Sharma, Research Manager, Software and Services, IDC, says it is clearly a Rs 5,000-6,000 crore opportunity. “I am sure all IT firms in India are looking to tap into it. Not just the big ones, but even the smaller IT firms have a great chance here.”

Will prices fall?

So far, prices have seen an upward trend across most of the IT products. While new prices of most of the products in 18 percent slab have increased by 2-4 percent, for many IT products in the 28 percent slab prices have gone up significantly.

DP Sinha, MD, Graphline Computers

“The price increase is majorly due to complexity of taxes. The government has put notebooks in 18 percent and laptop bags in 28 percent slab. Similarly, desktops are in 18 percent but monitors of 17-inch and above are in 28 percent slab. This has led to 3-4 percent increase in the prices. Moreover taxation on networking equipments like switches has gone up by 11 percent, which is quite high,” quips DP Sinha, MD, Graphline Computers.

Adds Paramjit Singh Juneja, CEO, Secant Technologies, “The price increase is intense in IT products placed in the 28 percent slab. On the peripherals, accessories, printers and printer supplies MRPs have been increased by 7-15 percent, which is quite significant. At the end of the day consumers will bear the brunt.”

However, there is a faction of industry experts who opine that with the input tax credit, prices would go down over due course of time.

Saket Kapur, PCAIT
Saket Kapur, General Secretary, PCAIT

“GST comes with advantages of input tax credit. The cascading effect of VAT, excise duty, and other taxes like Octroi has got subsumed in GST. Moreover, CST, which was non-creditable, has been subsumed in GST that is 100 percent creditable. I am of the considered opinion that input tax credit will bring the prices down, which is quite evident in the automobile segment where companies are transferring benefits to customers,” states Saket Kapur, General Secretary, PCAIT and FAIITA.

However, Anuj Aggarwal, Vice President and CFO, Canon India, counters that input tax credit would have helped in case the GST rates were at par with the previous taxes. “In most of the cases, GST rates are significantly higher than earlier; hence, prices of most IT products would increase.”

Mr.Anuj Aggarwal_President & CFO, Canon India
Anuj Aggarwal, Vice President & CFO, Canon India

He added that excessive tax on multi-function devices might lead to illegal imports and dumping of used MFDs into the country. “Nevertheless, while GST may pose few challenges, these are only short-termed. In the long run, this regime will surely be beneficial for all. The IT channel will benefit with ease of doing business and reduced fixed and variable expenses.”

Further, licensed software software market is expected to see benefits with GST. “Earlier packaged software attracted both VAT and service tax. Additionally, there was a lack of clarity on the excise tax being levied. These components cumulatively resulted in an effective tax rate of 25-28 percent. With GST, software vendors would have to deal with an effective tax rate of 18 percent,” shares Sharma of IDC.

Ease of business

According to most of the experts, the biggest benefit with GST would be ease of doing business with the end of regime saddled with multiple taxes, multiple interfaces and multiple compliances.

“The biggest benefits for traders are freedom to bill and unfettered movement of material to any location in India. Interstate purchases will be easier with no hassle of Form C. Further, IT channel will benefit from the input tax credit available for office equipment purchase, office rent, banking charges etc, thus lowering the fixed and variable expenses,” informs Kapur of PCAIT.

Nilesh Kuvadia, President, ISODA

Commenting on the ease of movement of material, Nilesh Kuvadia, President, ISODA, says, “IGST will make the inter-state transfer of goods very simple. In the earlier regime, we used to have loss of VAT in inter-state transfer of goods. However, with GST, we can claim 100 percent refund of IGST paid.”

GST regime will surely bring in more transparency with ease of business. It will offer a level playing field to organized players against unorganised ones. In fact, unscrupulous transactions and tax evasions will be tough with cross-check mechanism says Bhandari of Supertron.

Accounting and compliance

While GST has been framed with focus on transparency and more compliance, experts fear that the costs of compliance – specifically accounting and administration expenses – would increase in the short term for businesses, specifically service providers and distributors having pan-India presence and offices.

“This is because earlier, the registration was done only at the central level, and services could be provided through multiple branches. Now, the costs would increase as the companies need to register individually at the Centre as well as with the States where it has offices. There could be up to 111 taxation points, which may lead to complications,” discloses Sharma of IDC.

VK Bhandari, Supertron - 2
VK Bhandari, CMD, Supertron Electronics

However, there are certain benefits which may compensate for the pain on compliance. “Government’s plan to implement GST compliance ratings would motivate businesses to go for better rating. Further, organizations with better ratings will surely get preference from their customers,” states Bhandari.

In fact, customers will now prefer to do business with GST-compliant partners only, in order to claim refunds on GST. Hence moving toward GST is a win-win situation for all of us, adds Kapur of PCAIT.

Transition troubles

However, most of the channel partners are experiencing troubles with GST implementation and are voicing their concerns around preparedness of the market, variations in tax slabs, and confusion on HSN codes.

“Besides gaps in education and awareness about GST among customers and partners, the major challenge is setting up the systems ready for GST. Many of the small partners were using in-house developed or local solutions for taxation and compliance. They are facing challenges to make their systems GST compliant. Moreover, filing returns every month will also be a challenge for them,” explains Sugreev Singh Ranavat, President, RCTA.

Variation in tax slabs for similar IT products is another cause of concern. “GST has not maintained uniformity across IT products in its current form. For instance, single function printers attract 18 percent GST against multi function printers (MFDs) and printer supplies, which have been put into 28 percent slab. Similarly, networking cables, connectors and many networking products have been placed in 28 percent against the rest in 18 percent slab. This variation will not only create confusion, but also increase prices of overall solutions,” details Sudhir Arora, Director, Computer Gallery.

Krishna Choudhary, Director, Rashi Peripherals - 2
Krishna Choudhary, Director, Rashi Peripherals

“It would have been better if these few cases of disparities had been eliminated. Putting monitors in two different slabs doesn’t match any logic. We expect government to iron out these disparities,” suggests Krishna Choudhary, Director, Rashi Peripherals.

Rushabh Shah, TAIT - 2
Rushabh Shah, President, TAIT

Further, channel partners are raising queries over confusion on HSN codes. “Disparity in codes is a major concern as each vendor is coming up with its own codes, even the billing of the products by the distributors is based on different codes for same items. Vendors and distributors must resolve and clear the confusion,” advises Rushabh Shah, President, TAIT.

Moreover, most of the partners have experienced dip in sales in July. “While last week of June was quite good as customers feared increase in prices, first two weeks of July were total washout. We were able to do some business in July-end with demand from students,” says Juneja of Secant.

Mahesh Tomar, Team Computers
Mahesh Tomar, Director, Team Computers

Seconds Mahesh Tomar, Director, Team Computers, “The current quarter will see an impact on revenues as focus of most of the businesses is on process changes and GST compliance. Moreover, many of the vendors are hesitant of giving special pricing which will delay few of the upcoming and ongoing projects.”

Inventory issues

Liquidation of existing inventory is a major bone of contention for most of the IT channel partners. Many are facing losses on the aging stocks, where vendors are not supporting. “Even if we take a 60 percent refund on CGST and deduct 5 percent VAT, we have a deficit of 7.6 percent if we sell at the same prices (pre-GST prices). In the current competitive environment, it’s difficult to increase prices,” explains Ranavat of RCTA.

Navin Kapur, Krishna Agencies
Navin Gupta, Director, Krishna Group

Many vendors have come forward and are providing backend support to partners. “Many vendors have assured back-end support for the existing inventory. They have done physical audit of the partner stocks and have committed 6-7 percent back-end. Few vendors are providing excise duty passes to enable refunds. This will enable us to meet our ends,” shares Navin Gupta, Director, Krishna Group.

Pankaj Harjai
Pankaj Harjai, Director, SMB, Lenovo India

Further, most of the vendors didn’t pressurize partners to meet targets and allowed them to keep low inventories. “For May and June, we reduced our focus on fresh sell-in to ensure partners maintain thin inventories. Moreover, we provided excise invoices to the partners for refund. This enabled almost 80 percent of our partners to liquidate their existing inventories,” informs Pankaj Harjai, Director, SMB, Lenovo India.

Rajesh Kumar Tayal, Computer Touch
Rajesh K Tayal, Director, Computer Touch

However, partners raised concerns about vendors which were non-committal on partner issues. “Vendors like Brother and HP Supplies have remained adamant so far. Due to their apathy toward our issues, we are facing about 14 percent loss on Brother MFDs and HP supplies. Although HP Supplies sought details of the inventory till June 30, they haven’t communicated anything since then,” retorts Rajesh K Tayal, Director, Computer Touch.

Many partners also allege that few vendors in spite of offering support to partners increased the product prices. “Vendors like D-Link increased their product basic prices by 7-8 percent and asked us to sell existing stocks on the new prices in order to avoid any losses,” informs Dinesh Sharma, MD, OST Electronics.

However, selling old inventory at escalated prices is not easy. “It would mean selling above the MRP of the old stock, which will be difficult as customers are now quite aware and may raise questions,” points Juneja of Secant.

Choudhary of Rashi Peripherals clarifies that even vendors don’t know how much loss they would incur if they support partners at all level. “We need to understand that this is a transitional phase and few problems are bound to happen. I think the government should have been more generous in allowing input tax credit on the transitional stocks.”

Road ahead

Even though new provisions under GST will ease the process of conducting business for IT companies, there still remain several concerns, which need to be addressed. The government should ensure the GST addresses the aforementioned challenges so that the reform turns into a success for the IT sector.

Many IT associations including PCAIT, FAIITA, TAIT and ISODA have already given representations to the government officials and ministers. However, so far government has been non-committal on the concerns.

“We have given representations to the government and have asked to maintain uniformity across all the IT products. Rest of the issues around preparedness of the market, HSN codes and existing inventories will be sorted out in some time. We must provide at least a month for things to settle down. Let’s hope for the best,” shares Kuvadia of ISODA.

The basic idea behind GST is to create a paradigm shift from individuals paying more taxes to more individuals paying taxes. It would result in an increase in the overall tax base leading to more revenues for the government. Hence, government should also understand our concerns and make the terms beneficial for us as well, concludes Bhandari of Supertron.

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