The ‘India’ growth story, a dream unfolding steadily, calls for an overhaul in the existing taxation system and commercial environment, more than ever. To counter multiplicity of taxation woes--different rates, different types of taxes--at different points, a simple solution was imperative. If not a panacea to various indirect tax problems, the Goods and Services Tax Bill will certainly simplify the existing complex federal indirect tax structure. World over, the policy has been implemented in more than 150 countries and tasted considerable success.
With its touch points across finance, supply chain, IT, accounting, compliance and other organizations, this integrated taxation law is likely to affect the entire business ecosystem. But are companies ready to absorb the change and incorporate it? IT systems in companies will have to undergo huge changes with respect to GST implementation and understand their role in the compliance system. Functions like enterprise resource planning will experience massive modifications.
Dissuading the Grey Markets
The IT industry which has been plagued by the irrevocable grey markets will be highly befitted by the current GST framework. Once the effective GST comes into place, it could dissuade the grey market for these products, which enjoys a considerable part of the market. There shall be little incentive to purchase products from these markets at any point of product or service value chain.
Eliminating the cascading effect
India has encountered the problem of 'cascades' of tax on tax. Duties paid on inputs often cannot be claimed back/taken credit as a result of the chain effect of taxes (CST, octroi/local body tax/central excise/ Service tax) levied upon previous ones. In the entire chain, such additional cost gets absorbed at each level. In order to avoid this and bring more efficiency in the structure, these taxes need to be minimised and complete credit allowed to avoid getting passed on as cost. GST attempts to achieve it.
Entry of Foreign Firms
In the wake of globalization and making India a manufacturing hub, the country is now relaxing the business environment by exploring options to ease the entry of foreign companies bringing in investment and boosting the economy.
However, the challenge lies in the fact that foreign investors find it inconclusive to do business here, basis the complex structure to function. With the introduction of the new GST law, simpler tax structure will be in place and as a result, make the manufacturing sector more competitive. The paperwork will become simpler and there would be reduction in accounting complexities for businesses, bringing everyone on a level playing field.
Increase in tax revenues
India has very low tax compliance ratio, given India's tremendous needs for its growth. Not only will GST be India’s best bet to achieve fiscal consolidation, there is a huge scope to address tax policy and compliance.
The law, giving enough incentive for companies to declare transaction in order to claim tax credits will reduce overall tax evasion. Businesses will have only State and Central GST Departments to deal with instead of variety of state and central departments- bringing down- hopefully, disputes, litigation and cost of compliance.
Due to non-tax evasion and more tax collection, more money will come into the system and that money will be used for development.
Reassessing logistic delivery system
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 business to remodel their logistics and warehousing solutions. Currently they are solely catering to the needs to tax efficiencies - in many cases.
Engagement with law makers
The IT and the PC Industry has been actively engaging with the government and industry associations after the introduction of the model GST law. Sectors like IT would require discussions to understand business models and devise appropriate solutions.
As from a political standpoint, there is a need to meet halfway. Ideally, the bill should go through Rajya Sabha in the monsoon session in order to have a realistic chance of coming into effect wef 1st April, 2017.
All in all, in principle, the proposed law will bring more efficiency but in reality it might also lead to marginal increase in prices, initially. However, upon settling the teething troubles and a comprehensive implementation most industries are expected to pass on the tax efficiency benefits to the consumer.
(The author is CFO, Acer India. Views are personal)
Editor's note: This piece was originally published on 13 July, 2016. It is being republished in light of the Monsoon Session in Parliament that begins on Monday - July 18, 2016
Updated Date: Jul 18, 2016 11:14 AM