In an utopian world, businesses should drive taxes, but in the Indian context, it was anything but that. This was because businesses were left with little choice but to restructure their operations and model supply chain and distribution to reduce tax incidence under a host of indirect taxes. Multiplicity of taxes and the costs it attracted was a bane to their progress and willy-nilly the end user had to bear the burden. Come July 1st 2017, this is set to change. July 1st, will see the rollout of the Goods and Services tax (GST) in India.
GST has been identified as one of most important tax reforms post-independence. GST is a uniform indirect tax regime that removes the whole gamut of indirect taxes and simplifies tax administration. The implementation of GST is set to eliminate the many existing tax anomalies such as the cascading effect of taxes and double taxation disputes.
GST will be levied at multiple rates ranging from 0 per cent to 28 per cent. The GST Council finalised a four-tier GST tax structure of 5%, 12%, 18% and 28%, with lower rates for essential items and the highest for luxury and de-merits goods that would also attract an additional cess. Service Tax will go up from 15% to 18%. The services being taxed at lower rates, owing to the provision of abatement, such as train tickets, will fall in the lower slabs.
The ABC of GST
GST is a destination based consumption tax. This means it will be levied on the place of consumption rather than the place of manufacturing. India is implementing a dual GST. This means all intra-state transaction of goods and services will attract CGST (Central GST) and SGST (State GST). All inter-state transactions will however attract IGST (Integrated GST) which is a total of CGST and SGST.
GST will also not discriminate between goods and services, thus bringing the trader and the manufacturer on the same level from a taxation perspective. Another important change GST will bring about is from the aspect of claiming input tax credit. Under the GST regime, any buyer of goods or services will have to ensure that all vendors pay GST and file returns in order to claim input credit tax. The implementation of GST will thus lead to business transformation for all major industries as it will impact every aspect of business operation from procurement to pricing
Key imperatives for companies
As is evident, GST implementation is not just a tax trigger but a game changer for businesses. Organisations at this stage will have to assess the impact of GST on their business processes and develop an appropriate GST compliance strategy.
The need of the hour is thus to get familiar with the GST network and understand key areas of the impact of GST on their business and re-assess contractual agreements with vendors. This is because, claiming of input credit tax is now linked to the tax compliance of your vendors.
The next step is to register as a GST taxpayer with the help of third party service providers known as GST service providers or GSP. This is highly recommended as GST compliance is going to be paperless and fairly exhaustive on the electronic platform. This means all the raw financial details related to business processes must be tracked, accounted for and converted for GST compliance.
Doing this manually will be a tough task as compliance requirements have also increased under the new GST regime. An efficient GSP can help you overhaul or modify your existing ERP or accounting system to make a transition to GST and be fully GST compliant thereafter.
Positive changes that GST will bring about
Today a consumer pays at least 25% more than the cost of manufacturing of any product because of the various taxes that a manufacturer has to pay. With the GST being limited at 18-20%, the price of goods are likely to come down. Some products that are likely to witness a drop in prices are entry level cars and two wheelers, car batteries, paint and cement, prices of indigenously made mobile phones and electronics items such as lights, fans, air coolers, water heaters and even movie tickets (due to elimination of entertainment tax)
Some negative impact of GST
The GST will fuel inflation for the short term. Another problem with the GST that many pundits feel is not including liquor and petroleum under GST’s ambit. These are major revenue sources for the government and will keep it from widening its tax base at the moment.
Another major impact will be felt on the service industry as the effective service tax would increase to 18-20% from the current 15%. This would lead to the increase in air travel, hotels and restaurants, insurance premiums and investments. Other things that are set to become more expensive are cigarettes, branded clothes and jewellery and even mobile phone calls.
GST is set to change the way businesses are run in the nation now. Adapting to the new GST regime proactively will future proof businesses and ensure profitability continues unabated.