It would be prudent for businesses to open themselves for a possible rework of their pricing strategies by factoring in the tax changes
The idea of a GST for India has been under consideration for some time now. The introduction of VAT as a system of taxation of goods by state governments followed by an integration of central excise and service credits as well as rates are typically viewed as precursors to India transitioning into a GST regime. However, slow progress has been achieved on this front, due to the lack of consensus between the central and state governments, including deferment of successive deadlines. However, the cloud over whether GST will be introduced in India appears to be lifting with a series of positive reinforcements by the current government on its intent to introduce GST. This, coupled with the progress being reported on the efforts under way to resolve key differences between the Centre and states on the GST structure including compensation mechanism, leads us to believe that India’s tryst with GST is around the corner.
Given the task of designing a GST structure for India in 2007, the Empowered Committee of State Finance Ministers published the First Discussion Paper on GST in November 2009. The paper provides a glimpse on the expected GST structure.
To preserve the current federal system of taxation and especially the fiscal autonomy of states, a dual GST structure has been proposed with a Central GST (levied by the central government) and a State GST (levied by the state government) being imposed on every supply of goods and services from the stage of their import till their ultimate consumption.
While Central GST is set to subsume excise duty (including countervailing duties paid at the stage of import) and service tax, State GST is set to subsume VAT and entry tax amongst other incidental levies. Further, central sales tax or CST is set to be abolished.
Under an ideal GST system, there should be no differentiation in the tax treatment of goods and services. In the Indian context, it is expected that the initial GST regime may apply differential rates of tax on goods and services till a full convergence in rate is achieved in a few years’ time. Under the current indirect taxes regime, Indian taxpayers as well as tax authorities have been grappling with the appropriate taxation of intangibles; currently intangibles (such as electronic supply of software) are sought to be taxed as both goods as well as services. A differentiation in the rate of GST for goods and services will result in this debate continuing even under GST.
The hallmark of an ideal GST system is the uniform taxation of goods and services as they move across the country from the point of their inception to the point of their consumption. However, given India’s federal structure, special sub-national level rules are required to be framed to ensure appropriate taxation of inter-state supplies upon identifying the point as well as place or state of their taxation. An Integrated GST or IGST has been proposed to tax interstate supplies. Under the IGST system, it is expected that: (1) interstate supply of goods (whether sale or transfer of stock) shall be taxed by the state of their receipt/consumption. In other words, the current origin State CST cost on interstate sales/retention of VAT credits on stock transfers is proposed to be replaced with a destination State GST. And (2) interstate supply of services shall be taxed on the basis of special place of provision rules to be framed. It is expected that the current service tax place of provision of services rules shall be modified and adopted under GST as well.
Importantly, the mechanism is expected to ensure free flow of GST credits along with the flow of goods and services.
With political consensus emerging on the structure as well as implementation of GST, it appears that the government is looking at an April 1, 2016, deadline for rolling out GST. A key pending action step in this regard is the introduction and passing of the Constitution Amendment Bill on GST, which is a key enabler for implementing GST. The Bill, inter alia, seeks to enable the central government to tax intra-state supply of goods and empower state governments to tax supply of services. To recap, currently, taxation powers under the Constitution are structured on the principle of ‘separation of powers’ between the Centre and the states and the Bill seeks to align the same to enable uniform taxation of goods and services by both the Centre as well as the states.
A Cabinet note detailing the final amendments to the Constitution Amendment Bill (basis recommendations issued by the Parliamentary Standing Committee) is expected to be circulated soon. In terms of time frame, this Bill getting tabled and passed in the upcoming Winter Session is essential for GST to become a reality by April 2016.
In terms of impact on the industry, a sea change awaits the industry. From an overall financial impact perspective, given the imminent change in the rate of tax (on procurements as well as supply), as a result consolidation of key indirect taxes under GST, it would be prudent for businesses to open themselves for a possible rework of their pricing strategies by factoring in the tax changes.
Specifically, from a supply chain management perspective, when VAT was introduced a decade ago, several companies reorganised their sourcing and distribution patterns in favour of regional warehousing (i.e. local sales and purchases) on account of non-availability of CST credits; a reorganisation undertaken purely from a tax perspective. However, with the imminent phasing out of CST and possible GST credits in respect of interstate supplies, whether the stock transfer and sell model would continue to be efficient under the GST regime requires to be examined. Simply put, what used to be a tax-driven decision can possibly be decided on the basis of commercial exigencies under GST—i.e. cost inefficiencies associated with operating multiple warehouses across the country vis-a-vis business requirements for a ‘just-in-time’ supply.
Similarly, on the procurement front, the tax efficiency or otherwise of imports would need to be compared with that of domestic procurements.
In general, traders and service providers are set to gain additional tax credits under GST. By way of illustration, a trader will be in a position to avail credit of GST paid on service procurements (today a trader is not eligible to avail service tax credits); and a service provider will be in a position to avail of credit GST paid on goods procured (today a service provider is not eligible to avail VAT credits).
However, a sea change in the manner of undertaking compliance awaits, specifically for service providers, who under GST may need to move from a centralised service tax compliance to decentralised compliance across states from a State GST payment perspective. Changes possibly also await exporters of goods and services who may need to approach both the central as well as state authorities for a refund of the respective GSTs.
While progress on the GST front continues and key elements of the GST design structure have been published, there is little or no information available as yet on the manner of its implementation. With the tax authorities, thresholds for levy as well as the methodology and time-frame for compliance of current indirect taxes being varied, a confluence of the same is required to usher in a robust and hassle-free GST administration across the country.
It is hoped that the next 18 months are well spent by the central and state governments in educating the industry as well as tax administrators on the key provisions, implications and compliance of GST. Specifically, for businesses to gear up for the GST start date, it is imperative for their IT systems, compliance processes and documentation to be GST-compliant from day one. India should perhaps borrow a leaf from the learnings of Malaysia which had earlier this year announced a transition into GST and is currently addressing various aspects of GST implementation.
(With inputs from Jayashree Parthasarathy, director, BMR & Associates LLP)
The author is partner, BMR & Associates LLP.
Views are personal