It has now been 7 months of tax compliance for businesses registered for VAT. Having been in the accounting business well before the introduction of VAT, it is indeed heartening to note the subtle but definite changes in the business processes that the introduction of VAT has brought about. The changes are by way of corporate governance, more aware record maintenance, closer scrutiny of deals and documentation and above all setting up processes to ensure clear view of the business transactions.
Co-mingling of promoter and business funds was a given prior to VAT. With the introduction of VAT, business owners have become conscious of the need to maintain the business funds and personal funds in a very clear segregated manner. It was not unusual before for businesses to function without a bank account, the personal accounts were used for the same. Further, payments would be made from personal accounts for business deals, so would the amounts collected get taken for personal use. With Accounting being mandatory, tracking the business transactions for a tax period in such a scenario is next to impossible. This has pushed the businesses to adopt different practices to bring about clear segregation. Business transactions are processed only through the business accounts or cards which are used in a dedicated manner only for the business. Efforts to ensure avoidance of cash transactions are also undertaken. Petty Cash is also being managed in a better manner.
Record keeping was an issue, there were cases where new invoices would be raised with the previous pending amounts. Credit Notes and Debit Notes were rarely used. Invoices for petty expenses usually ignored. These practices were posing a challenge for the businesses to ensure proper accounting of their transactions and providing an accurate view of their VAT liability. Over the past 7 months, significant improvement has been noted in the way businesses ensure that they collect the tax invoices for their expenses. This has also extended to suppliers and customers consciously ensuring that any adjustments to the invoices are by way of Credit / Debit Notes.
The initial quarter for importers was really challenging, many of the clearing and forwarding service providers had just notified for update of TRN numbers without highlighting the clear process of how the imports would be processed. Further, there was a bit of grey area in registering the VAT numbers with the Customs authority. This did result in many of the small importers not registering their TRN number with the customs authority and also not notifying their clearing and forwarding agents. This resulted in the clearing and forwarding agents clearing the goods under their customs and TRN number and claiming the VAT and Customs duty from the importers. Now the importers have got a good hang of the process and import the goods using their own Customs and linked TRN numbers, resulting in better cash flow as the VAT on the imports is only payable as part of the returns and not at the point of import. Further, the tax returns also clearly have the pre-populated value of imports and related VAT liability for the importers to reconcile.
All in all, the above changes have come about on account of a conscious realization by the business owners of a need to be better organized, maintaining records, accounting for them and complying with their VAT responsibilities. This has also resulted in firms giving specific responsibility to staff members to track records, maintain files and petty cash with proper timely reconciliation. This is a good sign for businesses in the region for time to come.