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:
- Review your current vendor history to identify non-compliant vendors.
- Educating your vendors on the importance of being complaint under GST, especially when you are dealing with small vendors. This includes conducting educative programmes on fundamentals of GST, registration enrolment, invoicing/billing, timely return-filing, payment of tax, and so on.
- Share your GSTIN with your supplier, and ensure that the Tax Invoice received from your supplier is updated with your GSTIN such that it enables you to claim ITC.
- GST Compliance Rating will be very handy in evaluating the new supplier. Before finalising, make sure the compliance ratings are checked and factored in deciding a new supplier.
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.
