GST Bill: Here's why India Inc is kicked about the country's biggest ever tax reform
India Inc is keenly awaiting its passage. Many hail it as a tremendous reform and the biggest since liberalization in 1991
The long-awaited Goods and Services Tax Bill is expected to be passed on Wednesday in Rajya Sabha. With the major opposition party, Congress now agreeing to the passage of the bill, major hurdles for the Bill have been cleared.
With the introduction of the new law, businesses will be motivated to remodel their financial infrastructure and bring more efficiency, said businessmen in India Inc. Duties paid can now be claimed back/ taken credit as opposed to the existing chain effect of taxes (CST, Octroi/local body tax/ central excise/ Service tax) levied upon previous ones. Such additional cost will now not get absorbed at each level. The tax cascading will be minimised. GST will replace VAT, Central Excise, service tax and some other indirect taxes.
The incidence of tax, tax structure and set-off mechanism under GST will be significantly different compared with the existing indirect taxes since it is a consumption-based tax. Any interstate movement of goods will attract tax even though it is not a sale, informs Kaustubh Roplekar, Chief Financial Officer, Racold Thermo Pvt Ltd.
The government has constituted GSTN for creating online platform for returns and compliances. Hence, internal tax infrastructure needs to be aligned to those needs. All compliances will be online and will have very high information requirement since data to be uploaded would be at the transaction level. The existing ERP/IT system needs to be assessed and upgraded in order to support incremental information/data requirements under GST regime.
India Inc is keenly awaiting its passage. Many hail it as a tremendous reform and the biggest since liberalization in 1991. “The GST will help us tremendously,” said Adi Godrej, scion of the over 100 year-old Godrej Group. “Taxes will come down. For the group, the GST will go a long way as logistics, operational costs will come down. It will be beneficial to consumers, producers.” So will the price of companies products come down? Godrej said that can be decided only after the GST bill is passed.
Unless the final GST rate on each product category is known such calculation will be speculative, analysts said. With GST, overall taxes on goods are likely to come down and make them cheaper. However, there may be some teething troubles as the new law comes into effect. In the long run, the lower tax burden could translate into lower prices on goods for consumers.
Organisations will have to upgrade technology infrastructure, as most of the processes are automated in GST regimes in respect of tax credit, redesigning of invoices and other procedural aspects. Since all indirect taxes will be subsumed in GST, it will bring in significant change in processes, training teams and developing IT systems.
Most organisations have put any major warehousing or logistics decisions on hold till they have clarity on GST law.
At Racold, the company is prepared for it, said Roplekar, CFO. “We have sensitised the relevant functions for designing a supply chain which takes into account the set-off mechanism under GST and prevent any tax loss in the value chain. To pioneer the uniform understanding of GST across the value chain, we have commenced discussions and training to our vendors to ensure they will be fully compliant under GST regime since only then can Racold avail set-off credits."
The automotive sector will be benefitted, feel some. “It will be positive primarily because of the removal of cascading effect,” said A K Rastogi, GM (Finance), Nippon Audiotronix.
Currently most car manufactures are located in a few states in India. When they sell cars to other states, they charge 2 percent CST, which includes the cost of car as it is not creditable. “However, in GST regime, credit is available. Currently, the MRP-based payment of excise is applicable on accessories which cause higher landed costs, while with GST, this will no longer be applicable. With easy credit mechanism, all taxes on inputs will be set-off against the output liability of GST. Input may be capital goods or input service, credit of all is available for set-off,” said Rastogi.
Win-win, says India Inc
Many see it as a win-win situation for manufacturers, retailers, wholesalers and suppliers as they will all be able to recover GST incurred on input costs in the form of tax credits which will reduce the cost of doing business. “However, companies will need to reassess their logistic delivery and invoicing systems. Normally, companies set up warehouses in every state to avoid taxes because transfers of inventory from one state to another are not subject to CST while trade is. The new law will motivate businesses to remodel their logistics and warehousing solutions,” said Alok Dubey, CFO, Acer.
The law, giving enough incentive for companies to declare transaction in order to claim tax credits, will reduce overall tax evasion. Normally, a number of government departments (tax departments) exist which need to be dealt with. Businesses will now only have to deal with State and Central GST Departments instead of a variety of state and central departments. This will hopefully bring down disputes, litigation and cost of compliance.
One of the greatest benefits of GST is that it is built ground-up as a technology-enabled tax system, says Bharat Goenka, Managing Director, Tally Solutions Pvt Ltd.
“In the past, it was not feasible for the government to systematically mitigate the risk of fraud, since there was no practical human ability to keep track and trace the culprits – who could or would repeatedly create phantom organisations, and/or phantom invoices. However, GST gives extraordinary traceability. For one, it fully eliminates the ability to have phantom invoices. That alone, will massively reduce the problem,” says Goenka.
Goenka suggests that with the near ubiquity of Aadhaar, and the passage of the Aadhaar Bill, the government must mandate that all GST registrations are traceable to individuals based on their Aadhaar identity.
The government also expects regional parties such as TMC and JDU to support the GST Bill
Tax experts say that only 20 percent of - mostly big - firms are getting ready for the GST
Traders agree with the PM but feel they are not the only one responsible for the system. High tax rate, complex system, multiple administration having no accountability, unfettered discretionary powers, consumer avoids taking permanent bill, etc also contribute to generation of kacha bills.