 "Pad up for Goods & Services Tax")
Ten years after former finance minister P Chidambaram first proposed - in his 2006 Budget speech - the introduction of the Goods and Services Tax (GST), one of the most important indirect tax reforms might finally take off in April 2016. However, corporate India still appears ambivalent about its full impact on business, on the pricing of products and services, and on making their businesses and processes GST-ready.
"The biggest challenge is to understand the enormity of GST. It will impact every part of the business - from financial reporting and tax accounting to the supply chain. This will lead to potential re-design of procurement vendor contracts, buying models and changes in the IT and ERP systems," said Harishanker Subramaniam, partner and national leader, indirect tax, EY.
Tax experts claim there is no standard benchmark to assess the cost involved for companies to be GST-ready. "The cost involved for companies to be GST-ready will differ from industry to industry, and from sector to sector," says Prashant Raizada, partner, indirect tax, BDO India. Companies first need to get a GST impact assessment study done. Experts say, cash flow and working capital issues will emerge from these impact studies.
Experts say service companies might need a much higher effort and cost involvement in streamlining their processes and procedures and transition to the compliance framework.
Under the GST model adopted by India, both the Centre and states will levy GST on supply of services. So it will be important for service companies to understand place of supply rules. This is made more complex due to multiple jurisdiction and registration issues. Also, increase in GST rate for services could have potential cash flow and working capital issues for many such companies, says Subramaniam. "Many companies have still not fully understood the impact of one per cent origin tax that is non-creditable on their supply chain and could be a huge distortion. GST will have an impact across process, people and technology," he adds.
R Muralidharan, senior director, indirect taxes, Deloitte Touche Tohmatsu India, points out that GST is also an opportunity for the companies to pro-actively take action and make their supply chain GST efficient. "The benefits of such an exercise could be significant and far exceed the costs talked about," he adds.
Agrees Vivek Anand, chief financial officer, Uninor, the Indian arm of Norway-based telecom major, Telenor: "Preparing for GST is a big change-management event. Cost of compliance and complexity in business will go up. But in the long run, it will be good for the businesses ecosystem and the economy". Anand says as a service company with a mass-market presence across many states, after GST roll-out Uninor will have to register itself in all the six states it offers its services. This would require a change in IT and ERP system, and changes in its book of accounts to factor in tax incidence in each state. "The next 12 months will be a challenge as rules are not yet defined. The government should make the GST structure simpler and easier to comply with," says Anand.
Anil Chawla, managing director, Wincor Nixdorf, a German company that provides ATM and point-of-sale hardware, software and services, says that they, too, could not start preparation for GST due to lack of clarity on rules. "GST is a welcome step as it brings more clarity in the taxation regime. However the federal structure of the country could create challenges in its implementation. The dual GST structure complicates business process," he says.
Experts point out that going by international experience, GST could create an inflationary pressure in the economy for a period of 12-15 months after its roll-out. "The pressure would subside as the impact on product pricing start to play out," says Raizada. Competitive pressures would ensure that prices would come down over a period of time, say experts.
"Any new tax regime will have its own positives and negatives compared to the current tax regime. Normally one would assume that businesses would pass on the negative impacts to customers immediately leading to price increases in the short-run," says Muralidharan. However, over two to three years, businesses tend to share the benefits accrued from the tax regime with their customers, bringing down the prices.
Experts say business would have to give special attention to long- term contracts, while tax clauses have to examined for change of legal provisions. "Business contracts have to recognise GST's impact while drafting the agreements with enabling clauses to pass on the additional incidence of GST," says Raizada. Clearly, it is still early days in corporate India's journey to be GST-ready.
The road to GST: Some key milestones on the way
2006 The EC rejects central government's proposal to include petroleum products under GST 2014
"The biggest challenge is to understand the enormity of GST. It will impact every part of the business - from financial reporting and tax accounting to the supply chain. This will lead to potential re-design of procurement vendor contracts, buying models and changes in the IT and ERP systems," said Harishanker Subramaniam, partner and national leader, indirect tax, EY.
Tax experts claim there is no standard benchmark to assess the cost involved for companies to be GST-ready. "The cost involved for companies to be GST-ready will differ from industry to industry, and from sector to sector," says Prashant Raizada, partner, indirect tax, BDO India. Companies first need to get a GST impact assessment study done. Experts say, cash flow and working capital issues will emerge from these impact studies.
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Companies would need to look at ways to streamline processes and procedures, suitably to re-configure their IT and ERP systems and optimise their supply chains. "The efforts and costs involved would be largely dependent on the nature and breadth of business operations," says Raizada.
Experts say service companies might need a much higher effort and cost involvement in streamlining their processes and procedures and transition to the compliance framework.
Under the GST model adopted by India, both the Centre and states will levy GST on supply of services. So it will be important for service companies to understand place of supply rules. This is made more complex due to multiple jurisdiction and registration issues. Also, increase in GST rate for services could have potential cash flow and working capital issues for many such companies, says Subramaniam. "Many companies have still not fully understood the impact of one per cent origin tax that is non-creditable on their supply chain and could be a huge distortion. GST will have an impact across process, people and technology," he adds.
R Muralidharan, senior director, indirect taxes, Deloitte Touche Tohmatsu India, points out that GST is also an opportunity for the companies to pro-actively take action and make their supply chain GST efficient. "The benefits of such an exercise could be significant and far exceed the costs talked about," he adds.
Agrees Vivek Anand, chief financial officer, Uninor, the Indian arm of Norway-based telecom major, Telenor: "Preparing for GST is a big change-management event. Cost of compliance and complexity in business will go up. But in the long run, it will be good for the businesses ecosystem and the economy". Anand says as a service company with a mass-market presence across many states, after GST roll-out Uninor will have to register itself in all the six states it offers its services. This would require a change in IT and ERP system, and changes in its book of accounts to factor in tax incidence in each state. "The next 12 months will be a challenge as rules are not yet defined. The government should make the GST structure simpler and easier to comply with," says Anand.
Anil Chawla, managing director, Wincor Nixdorf, a German company that provides ATM and point-of-sale hardware, software and services, says that they, too, could not start preparation for GST due to lack of clarity on rules. "GST is a welcome step as it brings more clarity in the taxation regime. However the federal structure of the country could create challenges in its implementation. The dual GST structure complicates business process," he says.
Experts point out that going by international experience, GST could create an inflationary pressure in the economy for a period of 12-15 months after its roll-out. "The pressure would subside as the impact on product pricing start to play out," says Raizada. Competitive pressures would ensure that prices would come down over a period of time, say experts.
"Any new tax regime will have its own positives and negatives compared to the current tax regime. Normally one would assume that businesses would pass on the negative impacts to customers immediately leading to price increases in the short-run," says Muralidharan. However, over two to three years, businesses tend to share the benefits accrued from the tax regime with their customers, bringing down the prices.
Experts say business would have to give special attention to long- term contracts, while tax clauses have to examined for change of legal provisions. "Business contracts have to recognise GST's impact while drafting the agreements with enabling clauses to pass on the additional incidence of GST," says Raizada. Clearly, it is still early days in corporate India's journey to be GST-ready.
The road to GST: Some key milestones on the way
2006
- Then Finance Minister P Chidambaram proposes introduction of GST from April 1, 2010
- Parthasarathi Shome submits a study paper on GST
- Empowered Committee of State Finance Ministers constitutes the joint working group
- EC finalises its views on a broad GST structure with consensus on Dual GST (Central & State GST), separate legislation, levy and administration
- First discussion paper on GST released by the EC
- The 13th Finance Commission releases its report on GST
- The government tables in Parliament The Constitution Amendment Bill to enable roll-out of GST
- The Standing Committee on Finance tables its report on GST Bill
- The previous Constitution Amendment Bill lapses
- The newly-elected government sets April 2016 as new date for GST roll-out
- GST sub-committee in the EC proposes a revenue-neutral rate of 26.7%
- Alcohol to be kept outside the purview of GST
- All entry taxes proposed to be subsumed under GST, whether collected by states or local bodies
- Petroleum and petroleum products to be subsumed in GST, with nominal or zero-rated tax
- GST compensation to states pegged at around Rs 11,000 crore
- Centre to provide three-year compensation on the revenue loss incurred by states after GST roll-out