Goods & Service Tax in India
Goods and Service Tax (‘GST’) is an efficient, effective and modern mode of taxation which facilitates effective tax administration with minimum tax collection cost. The globe is having around 195 countries and out of that, around 140 countries are working on the GST model. Few developed countries like Australia (10%), Canada (5%) New Zealand (12.5%), Singapore (7%) etc. are among the first runners who adopted the efficient tax model. Even, our neighbor country Pakistan is also having GST but only the abbreviation convey the right expression, full form of GST in Pakistan stand for General Sales Tax!!
Now a days lot discussion on GST are going on among the Government authorities and trade. Expectations of Trade are on high sprits for the GST model. The objective of this article is to discuss expectations of Indian Inc. from proposed GST.
Multistage taxation on the manufacture i.e. Customs duty on imports, Central excise duty on manufacture, Central Sales Tax (CST) / Value Added Tax (VAT) on sale of goods, Service Tax on provision of services, Further levies such as Entry Tax, Octroi, Cess by the State or local municipal corporations/municipalities are the major block in the progress of trade. Above this Entertainment tax, Luxury Tax etc. are also playing an extra toping role to distaste the trade.
Even a common man can understand the plight of the trade who is bound to comply, pay, administer and then assessment which is also a time and energy consuming exercise. The present tax base may be lucrative in volume but not in value terms.
Tax model, devoid of multiple taxes and manifold compliance requirements which allow seamless credit mechanism, has been the dream of the industry for long. To lessen the plight of trade and to facilitate the easy administration of tax are two main causes which are pushing revenue authorities to change the present multi tax model into GST model.
Introduction of GST in India has started with the concept of CENVAT (merging the service tax input tax credit with Central Excise Input Tax credit). The concept of GST was recognized by the Indian revenue authority long back, but the first step was taken on 10th September 2004, when the cross input tax credit of Service Tax and Central Excise was allowed. Unified GST is the most appropriate model of GST, but whether the said model is workable in the Indian context, it is a big question to answer.
In India the power to collect tax is bifurcated between Centre and State. Unified GST model require collecting of taxes by Centre and then sharing with States. The requisites of said model would affect the basis fabric of the federal structure of the India. The state power of revenue rising would be exercised by the Centre which will create problems of dependency of states on centre. Further, managing unified GST by the Centre would not be easy task with the available resources. Further, bifurcation of Centre GST and State GST into goods tax and service tax would not fulfill the purpose of GST.
Press reports are confirming the dual GST which would jointly governed by state and centre. There is still a veil on the picture how dual GST will be different with the present multi level tax model. But it is almost final that unified GST would not be the future model of tax.
As per the one of the big four consultancy firm’s poll, “More than two thirds of respondents are not in favors of dual GST. Further, About 75% of respondents of specific sector like telecom, transport and logistics segments are not in favor of dual GST,”
Revenue Neutral Rate (RNR) is another centre of confusion. Presently Trade is paying around 20.74% (12.5% +8.24% = 20.74%) as Central Excise Duty, VAT (4% to 20%) along with the service tax @ 10.30%. Indian Inc. is expecting the consolidated RNR at the present level.
Subsuming of all Indirect Taxes is another fair expectation of the trade. However, trade is not convinced on the authorities promise to merge all indirect taxes due to the past experience on the VAT.
Exemption limit is like a weighing machine which needs to be balanced by revenue authorities to justify the administration cost as well as tax base. The threshold limit for present tax base is on a very conservative approach. The threshold limit should be on higher side so that tax collection cost and administration cost can be maintained at reasonable levels. Trade is expecting higher threshold limit so that transaction cost of the small trades may be justified.
Further the fate of general exemptions on the essential commodities and location based exemptions is not yet clear. However, it can be predictable that these exemptions may be prevailed in the form of payment of tax and then refund method. The experience of trade to get the refund is not very appreciative despite of genuine efforts of the revenue authorities. Trade is expecting clear cut exemptions on the product or location. However, exemptions would not fulfill the purpose of providing benefit to the deprived consumers. GST is consumption tax and exemptions can distort the basis objective. Consumer with high consumption power would avail the benefit of exemption.
The fate of stamp duty on transfer of immovable property is not clear. Trade is expecting subsume of stamp duty with GST. Further, it is also expected that subsumed stamp duty on the immovable property should be levied on the value added not on the full consideration.
Is Indian Company really ready to adopt Goods and Service Tax (‘GST”)? The answer of this question is really tough in the current scenario. Presently, Indian Inc. is bound to comply with multi taxes and sufferings in term of high tax cost. Short span of time provided to readjust and realign it business process will increase suffering further. How Indian Inc. can realign its business model, supply chains, logistics with in few month and how anyone can expect this!! Following are the few points on which Indian Inc. should act proactively on the new proposed GST model.
Business Strategy/Pricing Policy/Logistics
Impact of tax cost on pricing policy should be reviewed as per new GST rates on inputs/ final products. Options of backward and forward integration in terms of overall tax cost and efficiency may be explored.
Feasible study of inter state supplies or warehousing in terms of new valuation rules of goods and services would be the need of hour. Further, supply chain and distribution channels may need a review as per the new regulations.
First discussion paper on GST affirms few positions, like applicability of Integrated Goods and Service Tax (IGST) on inter state transaction, allowance of cross credit among goods and services, non allowance of credit among State GST and Central GST. Indian Inc. can evaluate the different feasible options and plan proactively the future course of action.
Abolition of Central Sales Tax (“CST’):
Revenue authorities are committed to abolish CST from April 01, 2010. On this auspicious day Indian Inc. would say good bye to CST and will welcome GST (may be delayed for further few months!!). Inc. engaged in manufacturing which are having presence on pan India basis needs adjustments/realignments in the supply chain due to abolition of CST. The cost benefit analysis of distribution cost vs. warehousing cost should be done to evaluate the tax impact on the products.
Statutory Concessional Forms:
Next action point for Indian Inc is the collection of statutory concessional forms. Form F (concessional form for branch transfer) may be the internal matter of the trade and easy to coordinate among the branches; will not pose as a big challenge. The bigger challenge is to collect Form C (concessional form for inter state sale). Proper strategy on coordination with the buyer would minimize the tax liability and future exposure.
Location Based Exemptions:
Inc. having manufacturing facilities in the state of Uttaranchal, Himachal Pradesh and availing location based exemptions need to review their business model. Present scheme of exemption may be adopted by GST in the form of first pay and then refund scheme. This scheme will definitely increase the working capital requirement of the company. Further getting refund would also require documentation and have administration cost. A study on the requirement of additional working capital would be required. Administration Cost Vs. exemption benefits should be evaluated to determine the best available option.
Most of the export promotions schemes like EPCG, SEZ and EOUs are attached with export obligations, which are calculated as per the current tax rates. Inc. availing export promotions schemes should do a study of impact of the GST and need to re-calculate the duty obligation with respect to the export as per the new rates. Surety Bonds executed with the revenue authorities would require a suitable amendment in view of changed liability as per the applicable GST.
Changes in the ERP System:
GST will come with the new tax rates; new formats of the invoices, returns, challan would also be amended as per the GST requirement. ERP need to be amended in terms of the above changes. Accounting entries for GST would also be required to amend as per the new tax model.
Training of the Middle Management:
Management should be ready to adopt the changes in the minimum period of time. As per the discussion paper, each state will have its own legislation. However, uniformity on the broad issues has been assured by discussion paper. In light of changed legislations, rates, formats core tax team should be prepared and well trained.
At the last but not the least, trade expects a reasonable time to realign business transaction as per the proposed GST model. In case of Direct Tax, the draft is available among the public, proposed to be implemented from 2012. GST draft which is proposed to be implemented from April 2010 (five months to go) is yet to take time to come into public!! The recent statement of Honorable Finance Minister surprised the trade that delays of few months would not a surprise for him, this delay can provide few more hours to plan for re-adjustment of business process.
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