Goods and Services Tax (GST) was on the anvil for the past many years and July 1, 2017, finally saw India shift to the new taxation regime. GST has brought more than five million small businesses, majority of which were operating offline, into the digital ecosystem. It has the potential of becoming something much bigger than just a one-sided tax system. This digital tax system has the ability to help small and medium-size business enterprises (SMEs) use their data more effectively, in turn driving better operational efficiencies, easier access to credit, effective management of cash flows, as well as superior customer relationship management.
The GST Network
The GST Network (GSTN) is the technology backbone of GST. The ecosystem consists of three major players – application service providers (ASPs), GST Suvidha Providers (GSPs), and the GSTN portal. A taxpayer has the option of directly accessing the GSTN portal or using third-party applications (like ASPs and GSPs), which in turn will connect with the GSTN system through secure APIs. Accessing the portal through an ASP or a GSP is a better option as these applications are much more user-friendly and customer focused. While GSPs are primarily limited to providing enhanced access to GSTN, ASPs are addressing most taxpayers’ compliance troubles.
Credit goes to the GSTN for building the taxation system as an open API-based platform. APIs will act as building blocks, which the ecosystem partners can use to develop innovative products and services. An inherent characteristic of an open platform is its network effect. The more suppliers (developers) you have on the platform creating apps and delivering innovation for the consumers, the more consumers will the platform attract.
In the API economy, the most successful companies will be the ones that open the door to third parties and make it possible for third-party sellers to sell to their customers. For GSTN to become a truly open platform, it’s imperative that the ASPs and GSPs also leverage the network effects of the ecosystem. ASPs and GSPs should be looking to open up their APIs and introduce developer programs to allow third parties to build and sell software products to their customer base. Third parties will use customer financial and tax data provided by the respective ASP or GSP, and build innovative products to generate value for the SMEs.
SMEs are vital for the economic growth and competitiveness of a country. But, the absence of digitized data has thrown a lot of challenges at them, such as paucity of bank credit, operational inefficiencies, poor customer service, and troubles in scalability.
Here is how the GSTN ecosystem can transform the operation of SMEs in India.
Easier access to credit
The biggest challenge that SMEs face is related to bank credit. Because SMEs largely work in an offline environment, there is a high underwriting and transaction cost associated with lending to them. With GST, there will be trustworthy digitized information on small businesses and a significant opportunity for Fintechs to enter the ecosystem. For instance, Fintechs using Big Data analytics to simplify the lending process can cut down borrowing costs and act as alternate lenders.
Better data analysis and trends prediction
SMEs face a tough time in analyzing heaps of data such as sales records, purchase records, and inventory data. Since this data is offline, and quite often, stored in silos, SMEs don’t have a unified visibility of and hence face problems in accessing and analyzing business data. The GSTN ecosystem will act as a central data repository, and data analytics tools will enable companies to make sense of this data and Identify sales trends and predict inventory needs.
Currently, SMEs are concerned about compliance with the new tax laws, and the ones which have been working offline so far, are facing hiccups in tax compliance and will continue to do so for a few more months. SMEs, apart from needing a tax expert, will now have to invest in technology and IT infrastructure.
There is no doubt that the simpler taxation regime of GST coupled with an easier process of availing input tax credit will provide SMEs a level playing field with big businesses, but their competitiveness will actually enhance when an open API-based approach combined with Big Data analytics completely revolutionizes the entire SME landscape. What do you think? Please share your thoughts in the comment section below.