Goods and services tax (GST), the biggest indirect tax reform of India has picked up tremendous pace with the smooth passage of Constitutional Amendment Bill in both the houses of Parliament in August 2016. The government is progressing with strict timelines and its commitment to roll out nation-wide GST from April 2017 is evident from the fact that the Bill has been ratified by the required number of states.
The government has laid down a clear roadmap to GST, laying down the step-plan to complete various administrative and legislative framework such as, setting up of IT backbone, formation of GST council, change management including phased trainings of officials and outreach and sensitisation to trade and industry.
It is clear that GST will be the biggest gamechanger as it will transform India into a single integrated market, simplify taxes and reduce cascading effect of tax on the cost of goods and services, thereby, benefitting all stakeholders, i.e., government, corporates and consumers.
GST will overhaul the current indirect tax system and will impact all facets of business operations of any company, for instance, pricing of products and services, supply chain optimisation, IT, accounting and tax compliance systems.
Given the time constraints, industries would need to gear up and strategise the integration of GST into their operations. Based on the information available in the public domain either in the form of process reports or draft Model GST law, the companies should commence impact assessments on key business areas such as tax structure, profit and loss account, working capital requirements and IT systems.
Under the GST regime, tax cascading will be minimised enabling changes in the cost structure for all sectors namely manufacturers, traders and service providers. The consolidation of both goods and services tax will overall lead to lowering of tax cascading. Therefore, it is imperative to evaluate the impact of GST on the top line & earnings and re-align the business transactions such as promotional and marketing schemes based on their impact under GST.
The companies which are currently enjoying tax exemptions/incentives under excise or State VAT laws (through state industrial policies) should evaluate the quantum of benefit available to them under the proposed GST regime. The present set of exemptions are likely to get converted to refund mechanism under the proposed GST regime. Also, it is expected that State VAT benefits will be limited to SGST component, whereas, the central excise benefits may be limited to CGST component. However, clarity on this aspect is still awaited from the government. Therefore, it is important for companies to evaluate the quantum of incentives that will be available to them. They can initiate the dialogue with the government so as to protect their incentives basis for which huge investments have been made in terms of infrastructure and employment generation.
With the change in cost structure, the companies will need to evaluate their working capital and ascertain cash flow exposure, if any. It is proposed that GST will be levied on all supplies of goods and services with or without a consideration. An early evaluation of working capital requirements will enable a company to plan its capital requirements. The finance cost (i.e. lower interest versus higher interest) will ultimately impact the overall profitability of the company.
In parallel, companies should also evaluate pricing pattern of products or services. In a price sensitive market like India, pricing study gains importance to take a business decision on product pricing.
The current indirect tax regime enables a company to operate through multiple warehouses across the country, undertake stock transfers free from tax and avoid non-creditable tax costs on account of Central Sales Tax (CST). Post the implementation of GST, every interstate transfer will possibly be subject to GST, irrespective of the nature of transfer. This will eventually eliminate the need to operate through multiple warehouses across the country. Therefore, supply chain decisions including supplier base restructuring needs to be relooked at from business consideration perspective and not from tax perspective. Depending upon the business needs, companies may look to consolidate small warehouses and operate through mother/central warehouse so as to minimise the operating cost of managing multiple warehouses.
Under the GST regime, the credit eligibility of a company will largely depend upon suppliers GST compliances. Therefore, under the GST regime companies would prefer to engage with suppliers having GST compliance as top most priority. Have a robust IT systems in place to ensure timely compliances, so as to ensure there is no denial of credits to businesses. This shift in the business dynamics may lead to consolidation of suppliers.
In summary, the purpose of such financial and business operations evaluation is to identify uncertainties and operationalise opportunities under GST. Considering that the countdown to GST has begun, the industry needs to cover a lot of ground in the coming months considering April 1, 2017 as the target deadline for GST rollout. With this revolutionary indirect tax, the early movers can capitalise on the options and benefit the most under the changing dynamics of the Indian economy.
(With contribution from Kishore Kumar, director—indirect tax, PwC)
The author is partner, indirect tax practice, PwC. Views are personal