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In the erstwhile regime, the value of input credit availed by you did not depend on the remittance of tax liability by the supplier. As a result, the compliance of vendor was not an influencing factor in vendor evaluation. Largely, it was all about the cost, quality and efficiency of supplier in delivering the product or services.
Under GST, compliance of your vendor will be one of the critical factor in selection/evaluation of your supplier. This is because your input tax credit will be dependent on your supplier’s compliance, that is, your supplier should file the return. He must declare the outward supplies along with the tax payment, and post-matching of invoice. If your supplier fails to furnish a valid return, it will cause a major dent to your cash outflow. This is because, the input tax credit claimed by you will be reversed and you will be asked to discharge it along with interest at the rate of 24%.
Also Read: Reversal of GST Input Tax Credit (ITC)
Businesses, especially SMEs, operate with very thin margin of 2-5%. A delay or loss of input tax credit will have a severe impact on the profitability. And in the longer run, if utmost care and caution is not taken in evaluating the supplier of their compliance adherence, it may affect the continuity of the business.
The following are few immediate actions which may help you to mitigate the risk of ITC due to supplier compliance:
Knowing your supplier’s registration type will also be one of the critical factors which will help you in determining who your right type of supplier is. You need to know whether your supplier is Regular Dealer, Composition Dealer or an Unregistered Dealer (URD). This is because, depending upon the type of customer you are catering to – Registered Business or end consumers, purchase from the above mentioned type of dealers will have impact on your cost and profitability.
If most of your customers are registered businesses (B2B), procuring supplies from Registered Dealer will enable you to avail ITC. This will be cost effective due to elimination of cascading effect vis-à-vis, buying from composition dealer may prove to be costlier since tax paid by him on his inward supplies becomes an integral part of product cost. And, buying from an unregistered dealer will increase your compliance burden since you are required to pay tax on reverse charge basis.
Best Practices to Evaluate, Purchase and Implement Business Accounting Software