The CAB will now need to be ratified by at least half of the states and then put up for Presidential assent. The GST Council will be formed within 60 days of Presidential assent, and will comprise the Union finance minister and state finance ministers, who will decide important aspects such as the GST rate, exemptions, administration, etc. Considering the fact that implementation is slated for April 1, 2017, the available time for the transition to the GST regime is very limited.
Being a transaction-specific indirect tax, the GST will affect different areas of business, including supply chains, pricing, strategies, procurement, costing, expansion plans, IT/ERP systems, etc. Therefore, a successful transition from the present tax regime to the GST regime will enable businesses to be prepared well in advance. Since a significant quantum of analysis and changes would need to be carried out in the affected areas within a short time, it will be a race against time.
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GST is not just a tax change but more of a business change, and is going to be the game changer of this decade. The inevitability of the change precludes any discussion on whether we are ready to adapt to the new changes affecting business. Progressive businesses would have already started to change processes, and others would be planning to get on board soon. We discuss here some of the areas which will be impacted the most on account of the change.
A comparison of the present tax outflow with the one in the GST regime is the most important aspect that needs to be analysed. It will not only help in identifying the change in the tax liabilities or cash-flow requirement, but would also bring the opportunities to undertake any possible transaction structuring. The GST rate is anticipated at 18-22 per cent for most goods and services, and hence a conscious analysis of tax outflows needs to be undertaken.
Subject to certain restrictions, it will be possible to avail the credit of input GST for most business expenses. Accordingly, businesses will benefit in respect of those expenses/procurements wherein credit is not available under the present regime. This would include identifying and selecting vendors to create a proper mix of Central and state GST credits. Additionally, it would be imperative to understand the manner of transitioning the credits available in the present regime to the GST regime, to avoid any loss on account of restrictions.
The IT/ERP system is the backbone of any business, and with the introduction of GST, the coding in respect of the overall structure of the IT system, application of taxes, eligibility of credits, etc. would need to be amended. In addition, the master and transaction level details will be modified to greater extent, as both the customer master and vendor master are expected to be significantly impacted.
Contracts and agreements for various business arrangements are another vital aspect of any business. Generally, businesses tend to execute long-term contracts with trusted vendors as well as customers, specifically in case of construction/EPC contracts. These long-term contracts will require detailed scrutiny and analysis from the GST perspective. Tax clauses would undergo a complete change as compared to the present one. Modifications in the structure of transactions may require businesses to enter into new contracts in line with the GST regime.
GST, being a self-assessment tax, would require the taxpayer to undertake multiple compliances, as compared to the present regime. The GST Network will maintain electronic cash ledger/credit ledger qua taxpayer-based on the information submitted from time to time. The eligibility and availability of input tax credit would need to be determined with the help of these electronic ledgers, as tax credits are one of the major areas of concern for any business organisation. Besides, the concept of compliance rating has been introduced to benchmark the quality of compliance of the tax payer.
On an overall basis, business houses must also understand the tax implications, including treatment of present incentive schemes in the GST regime, at the time of making substantial investments. Also, corporate restructuring like mergers and acquisitions, including slump sale transactions, would be impacted, as these may be treated as exempted supplies, resulting in reversal of input tax credits.
In nutshell, GST is a nation-wide transformation, which would change the entire perspective of business. Even the prime minister has defined GST as a "great step towards transformation", while addressing the Lok Sabha during the vote. However, trade and industry will have to start preparing for the change early, to avoid any eleventh-hour problems.
M S Mani is Senior Director and Hardik Shah is Senior Manager, Deloitte Haskins & Sells LLP