The new Goods and Services Tax (GST) in India is the biggest overhaul of indirect taxation in a generation. Implementation demands both a strong technology backbone and mobilisation across the business and wider supply chain.
Our current indirect tax system is a patchwork of overlapping state and central government taxes.
We have the central government’s service taxes, customs duties and excise duties on the one side and multiple value-added taxes, state excise duties, duty on various goods entering towns or cities, entertainment taxes and other state-levied taxes on the other. The anomalies, inefficiencies and complexities that stem from having so many different taxes to contend with create considerable administrative headaches for companies and make it hard to manage business seamlessly across multiple states.
The unification of the various levies is therefore a welcome step towards an integrated nationwide common market. Most of the taxes will be replaced by a harmonised GST. Yet this opens up a fresh set of business-wide demands. GST has the potential to affect pricing, cash flow, working capital, supply chain and IT systems.
As outlined in our article ‘Getting up speed with VAT/GST in emerging markets’, rather than just tax and finance teams, the business as whole should be involved in preparation and implementation. And while the move to GST presents difficult challenges, it could also provide the catalyst for business transformation in areas ranging from IT to supply.
So what’s involved? The Government has proposed a four-tier rate structure for GST, ranging from zero to 28%, with a lower rate of 12% and standard rate of 18%. There’s also the possibility of additional levies on ultra-luxury goods such as top-of-the-range cars and unhealthy products such as tobacco.
Our experience of GST implementation in other countries highlights the strategic questions. GST will affect consumer prices and can therefor attract a lot of controversy. The potential sensitivities are reflected in the legislative and start date delays we’ve seen here in India (GST is now expected to go live on 1 July 2017). It’s therefore important to ensure that the impact on pricing is carefully mapped and managed, not just from the tax itself, but also the additional data, systems and operational demands.
Businesses that move early to assess the impact and get ready to respond can use the change-over as a commercial opportunity through such moves as selective price offers to undercut less prepared competitors.
GST shifts the tax revenue base from where goods and services are produced (origin-based tax) to where they are consumed (destination-based tax). As the tax is effectively levied on the difference between the purchased and the resale price, businesses can reclaim as well as pay tax.
Making sure that businesses pay all that’s owed and reclaim all that’s due requires them to maintain a tax information system that mirrors the supply chain. A flaw or break at any point in the information system will compromise the tax credit chain for those higher up the supply chain and hence affect their ability to reclaim tax. Getting this wrong could jeopardise cash flows and open up the risk of compliance breaches and sanction. There is therefore a built-in incentive towards transparency, better compliance and credit matching.
Further challenges come from the electronic sharing of data under the new GST, which forms part of the Government’s drive towards greater digitisation of the economy and public services. With backing from central and state governments, a new non-profit making organisation – the Goods and Services Tax Network – is developing a comprehensive IT infrastructure capable of administering all areas of tax compliance, registrations and credit online. The digitisation of GST and wider compliance underlines the importance of an effective systems foundation for the GST, which is integrated into business and supply chain management.
Given the complex demands and their wide-ranging impact on the business, we believe that it’s vital to start planning and taking concrete steps towards smooth implementation now. The terms of the Model GST Law are now in place, so we know a lot of what we need to get going.. It’s important the business recognises GST as a competitive rather than just compliance issue, and is fully informed and mobilised ahead of July’s go-live.
To discuss the GST implementation in India please contact us or for further information on the shift to indirect taxes and this whole of business change take a look at our insights on indirect taxtion.
Vikas Vasal
Partner and national leader – Tax
T +91-9810784829
E vikas.vasal@in.gt.com
Krishan Arora
Partner, indirect taxes
T +91-9818341530
E vkrishan.arora@in.gt.com