Why wholesalers, retailers floating new companies to be GST compliant?

These days, a number of wholesalers and retailers are setting up new companies so that they can be compliant as per the goods and services tax (GST) regime. They are of the opinion that this will help them become start anew, with a clean slate. This is even more important since they have previously had trouble with keeping their books in the right order. Several consultants who work with wholesalers and small retailers on issues related to tax say that the number of such companies will only increase in the future. These tax consultants say that people who were previously evading taxes and whose inventories were unaccounted are now being forced to do creative accounting and readjustments.

Issues in supply chain management

A number of supply chain managers of multinational firms have been flooded with requests that have come from their wholesale partners. They have been asked to start dealing with these newly floated companies that are expected to be compliant as opposed to their predecessors. These firms are very particular about avoiding any scrutiny being done on their old books. In fact, the rush among wholesalers to start new companies and be compliant with the new regime of GST is quite noticeable.

Open secret

These multinational managers are also saying that it is almost an open secret that these companies do not pay their taxes and a lot of them also do not provide actual records of their sales. These managers are however sure that the new firms floated by the same owners would be compliant. So the question that needs to be asked now is how do these wholesalers move their business from one entity to another. The wholesalers are saying that the new companies are being opened under ghost addresses. Later on, the old or existing shop will be declared as a branch of the new company.

Floating new companies after GST
Floating new companies after GST

Closing stocks

It is expected that the wholesalers and retailers, who are opening these new firms, will show zero closing stocks as on June 30 for the older firms. They are supposed to make forged bills that would show that their entire inventory has been sold out. They will keep selling the leftover inventory under the guise of their new company and this way they would get rid of it in a slow and calculated manner. The main reason for such rush is the fact that GST does not leave much room for tax evasion.

The inherent element

The structure of GST has been designed in such a way that there are already restrictions on claiming input credit against tax that has been paid on inputs that are used in making a product and matching invoices. Devangshu Dutta, Chief Executive of Third Eyesight, has said that in case a business entity is not compliant with GST then it would find really hard to claim any input credit at all. This will surely affect their margins in a negative way. This is going to be especially critical for the small traders whose margins are already quite low. For them input credits are really important.

Difficulty in tax evasion

There is yet another reason why it is so hard to evade taxes under GST. The new system has introduced the system of matching invoices under the technology platform known as GST Network (GSTN). The process will start as soon as a seller uploads all the invoices. This is the reason why all the members of the supply chain would wish to be compliant with the new system. In fact, wholesalers are saying that big companies have been asked quite clearly to not work with any firm that does not have a GST number.

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