With the recent approval of central GST laws and rules by the lower house and the GST Council respectively, implementation of GST in India from 1 July 2017 appears apparent.
After knowing the broad structure of GST proposed for India, it is time for the industry to focus on the transition tasks to be undertaken to prepare for any unwarranted disruption in carrying out business.
Even though multiple interpretations on a practice to be followed is unquestionable, at this stage, it is expected, from evidence from other countries who introduced GST, that certain positions would emerge from the interpretations to be adopted by tax authorities and the rules and guides introduced by the government during the transition.
GST claims to change the way of conducting business, which is expected to be easier and simpler to administer. Keeping this in mind, we have listed below key tasks every business must undertake during this transition period to derive maximum benefit of this major change.
1) Review of business processes and supply chains to identify the incidence of GST and requirement for additional working capital for transactions not being taxed at present
GST is expected to have an impact on prices, business processes, investments and profitability in all segments of the economy. Under the proposed GST structure, tax is expected to be applicable at each stage of the supply chain and credit to be available to the respective buyers.
Tax incidence is expected to be once on the end customer and all taxes at different legs of the supply chain are expected to be creditable. From the consumer point of view, the biggest advantage is expected to be the reduction in the overall tax burden and embedded tax costs on goods, which is currently estimated at 25%-30%.
Therefore, assessment of impact on revenue, pricing of products, costing of goods/services to be procured, working capital, availability of credit of GST etc. is quintessential to make any change in tax driven processes such intra-state sale vs. inter-state sale, transfers to own depots without payment of tax, in-transit sale, high sea sales etc. and reduce costs of operations.
GST is also expected to allow credit of certain items, which are not available under the current laws such as taxes paid on input services cannot be adjusted against output sales tax liability etc. Therefore, this assessment of the business processes would also enable businesses to make procurement strategies to optimize credits.
2) Discussions with suppliers and customers and necessary amendments to contracts and business terms
Businesses should initiate discussions with their suppliers and customers to make them aware of the upcoming change and intimating timelines for receipt or issue of payments, invoices etc. in order to overcome any transitional challenges. In case, the suppliers are expected to benefit from GST on account of additional input credit, businesses should renegotiate their prices.
Supplier and customer contracts and business terms to be reviewed for necessary amendments to enable charging of GST once implemented. This will help manage the transition to GST and ensure recovering of any additional tax impact
3) Accounting and reporting requirements
It would be of utmost importance to identify the accounting and reporting requirements under GST in order to assess if the current system needs to be entirely revamped or can be managed with modification. Some of the major changes proposed under GST regime, as compared to the current indirect laws, warranting a major change in the tax accounting and reporting are discussed below:
There is a major change in the taxable event as it stands under the current indirect tax laws (such as manufacturing for levy of central excise duty, sale of goods for state sales tax, provision of service for service tax etc.). In the upcoming GST regime, taxable event would be ‘supply’ of goods or services in the entire value chain.
Central sales tax (CST) incurred on inter-state purchase of goods at 2% (on Form – C) or in the range of 5 to 15%, not eligible as credit at present, will be abolished and replaced with Integrated GST (expected at 18%) which is creditable
c. Adoption of destination based consumption tax principle, which means tax would be levied at the place of consumption of goods or services or both. Therefore, for every transaction, we need to ascertain the state where the supply is being consumed. Specific rules for place of supply for goods and services have been prescribed in the proposed IGST laws.
4) Technology changes to support GST compliance once implemented
Considering that the GST structure proposed for India has been envisaged to be administered through a robust information technology platform on account of rigorous compliance requirements, businesses must assess of technology changes required to facilitate GST compliances.
All existing indirect tax functions being supported by technology such as tax structure, tax computation, tax payment, tax incidence, availing credit and utilization etc. of existing businesses may require modification to align with GST structure. Some of the key areas which may need technology changes maybe:
Particulars to be included in invoice, recipient vouchers, purchase orders, bill of entries etc.
b. New general ledgers to be created to meet reporting requirement under the GST regime.
c. Changes in vendor master to include GST registration number and other details of vendors as required.
GST return formats are different as compared to the various returns under respective indirect taxes at present.
Systems needs to be updated to incorporate the new return formats and details as prescribed.
Above would facilitate transfer of eligible credit from current regime to the GST regime and file the first GST return and make GST payment as per the prescribed timelines. Considering date of implementation as 1 July 2017, taxpayers who have not started preparation for the transition will need to act fast on the above to ensure GST compliance by 1 July 2017.
Written By : Saloni Roy (Senior Director) and Mausumi Saikia (Manager) Deloitte Haskins and Sells LLP