The Monday mindset: 10 July 2017

GST: An opportunity for fintech firms in India?

Fintech zeitgeist! Every Monday, we might look back at last week; look ahead to this week; share a few thoughts (our own or others); or discuss anything that catches our eye.

This week, Soumik Roy discusses India’s Goods and Service Tax (GST) and whether it’s an opportunity for fintech firms.

First discussed by a committee headed by Asim Dasgupta (Minister for Finance and Excise) during the Vajpayee Government in 2000, the current Modi Government pushed forward and implemented GST across India on 1 July 2017.After 17 years of deliberation, India joined the ranks of the UK, Singapore and 140 other countries that use the concept of GST.

Now, while social media platforms are full of stories of people angry with the roll-out of the tax because prices “seem” to rise – a careful study of the tax reveals that (i) the tax is set to help bring down prices of necessities but makes things like the provision of financial services more expensive (18% now compared to the 15% charged previously) and (ii) corroborates (reasonably) the Governments’ expectation of a 14% revenue growth.

The reduced tax on necessities such as milk, meat, and bread was apparent when the new rates were revealed in May. However, the growth in revenue isn’t all that apparent – but seems reasonable as new laws make it mandatory for firms with less than INR 100 million ($1.5 million) to digitise their sales and create an audit trail for the tax bureau.

What this does is bring mom-and-pop stores, cash-and-carry traders, and other cash-rich businesses into the tax fold by making it impossible to neglect to report sales and evading taxes. How will they do this? Through the Goods and Service Tax Network (GSTN), a shared IT infrastructure for taxpayers and the Government, run by a company of the same name, it aims to create a digital audit trail for every business.

Now, as far as opportunities are concerned, there are two (i) a need for fintech-based software packages and solutions that simplify compliance with GST and (ii) the challenges that GST brings to independent financial advisors (IFAs) who might make space for digital platforms to take up a bigger share of the pie.

Software solutions can help small and medium enterprises (SMEs) with software packages that help them go digital and simplify invoicing, reporting, and filing requirements. ClearTax, Zoho, Deskera, Tally, Zoho, and several other fintech firms are offering and working on improving such solutions at the moment. Since GST requires everyone to feed data into GSTN, digitally, fintech firms can pitch their software, training, and implementation or migration solutions, all at once.

IFAs on the other hand, especially those who handle a few clients and earn less than INR 2 million ($31,000) – who don’t require to be registered under GST per regulations, might face difficulties with regards to holding on to clients and earning their commissions – as details around input tax credits from GST are murky for such providers.

Asset management companies will however charge all distribution partners irrespective of how they manage input tax credits – which will make operations expensive for IFAs. This allows fintech firms to do two things – find clients who’re not being served well by IFAs and win them over, or create a mutually-beneficial relationship with one or more IFAs to increase their own asset base and help the IFA with input tax credits and streamlined operating costs.

All in all, there is light at the end of the tunnel and GST seems like an opportunity for fintech firms.

Last week’s Monday mindset was all about fintech events and how they could be better.

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