GST: Finally at India Inc’s doorstep

First published in the Herald

Wow, finally a decision, it took a good 20 years but it has arrived at the doorstep of India. The much awaited Goods and Services Tax has finally seen the light of day. There are still a few things that need to be done before implementation but no turning back now. India Inc., has to prepare for its rollout, anytime after 1^st April 2017.

The Government is surely going to pull all stops to ensure timely implementation; the Bill needs to be ratified by Lok Sabha and atleast 15 States have to adopt it before getting the assent of the President. All States bar Tamil Nadu are on board so there should be no hiccups. The reason TN is opposing it is because it is traditionally a manufacturing State and benefited under the current tax regime. GST is different in that sense as it is a destination tax and accrues to the consuming State and thus addresses an existing anomaly in the system.

The back bone that is being set up is GST Network or GSTN. This will be the interface between Center State, Banks and Companies and with electronic credit matching; compliance requirements could be pretty stringent. Private IT systems will now have to begin the task of becoming GST compliant, with details still being worked out, not much can be started so there will be a rush a little later. This will be the key to ensuring that those who make fake bills are shown up as all transaction have to be uploaded immediately.

In the foreground the GST law making process will take center stage and surely will not be easy. The key issue everyone is look at is the Revenue Neutral Rate, which will be decided by the GST Council. Currently 18% is being talked about. This council will subsequently also oversee the States demand for change in rates. As such it will not be easy for States to make arbitrary changes in rates as is the case at present.

The model law at present is attempting to widen the input tax base, but it will need tweaking as currently its provisions are more skewed to a lesser input tax regime or imposes restrictions on taking input credit in some situations, to ensure seamless credit more work needs to be done.

GST is a game changer. It is not just a new tax but will affect every aspect of business, including cashflows, pricing, supply chain, accounting, IT systems etc. It will change the way business is done. Take the example of a factory having warehouses in different States. Today they stock transfer and there is no tax till it is sold from that point. Under GST, the tax will have to be paid for stock transfers, the advantage is the credit in the books is also transferred to the stock point where it can be used at the time of sale. This means that a Company in Goa will benefit if it sells most of it goods outside Goa. Earlier the credit accumulated in their books and could not be used. In such cases the companies preferred to buy from vendors outside Goa paying 2% CST rather than from Goa with paying VAT at 12.5% and having funds blocked. Now manufacturers will have to consider if it is useful to have warehouses and stock points purely for tax purposes. Vendors from outside a State can be more competitive as there will be no 2% CST or C form hassle.

Another significantly different approach is that one can take credit on receipt of invoice, however if the seller has not deposited the tax within 90 days with his quarterly return, the buyer will have to reverse the tax credit with interest. So the onus of ensuring that the tax is paid is on the buyer. While this sounds harsh, it actually moves the policing away from the department to the buyers. If a credit is disallowed the buyer will refrain from using this supplier, and hence only those suppliers who comply will be able to operate in the long run. Tax evasion and avoidance will be curtailed automatically if not eliminated. Without bill transactions should be a thing of the past.

Once GST kicks in there will be transition of unused credits, so the tax paid on inputs on stock will be allowed to be carried forward as input tax credit under GST. Questions will remain till the details are ironed out. What happens to the CST paid under current tax regime, will it add to the tax credit or will it lapse as before?

Valuation will be based on the existing Central Excise and Customs rules with arm’s length and related party transactions being the guiding principle. But surely this is one area where litigation will be rife. Under GST even free samples or promos will attract tax, so what happens to loyalty points then?

Companies will have to prepare a road map for the switch over. Big or small an impact analysis will help understand in which areas costs will increase or decrease, how will cash flow be impacted and what IT changes will be needed in existing systems etc. For this each Company will have to set up a core team, who will study the impact and if required they must be ready with their representations when the GST Law is in draft stage. They must get copies of the statutory registers and records that will be needed so as to plan for their implementation. Employee training will be a must. Finally, everyone must put their heads together and decide what part of the existing business model has to be reworked.

Make in India, sell anywhere in India. If you get it right, your business can benefit from GST.