How India’s New GST Will Impact Businesses
India’s controversial GST (Goods and Services Tax), the sales tax reform, has finally come into effect. On July 1, 2017, GST was rolled out by President Pranab Mukherjee and the current Prime Minister Narendra Modi in a special midnight session which was attended by both houses of parliament. This reform is expected to unify the $2 trillion economy under one tax umbrella.
The objective of incorporating GST is to remove the current imperfections prevalent in indirect taxes and improve the tax compliance. This will boil down to mitigate the effects of costly tax cascading on end consumers. The implementation is also expected to trigger growth in business and economy in India. While the GST is hailed by many to be the driving force to catapult India economically through “one nation one tax,” it has encountered many roadblocks. The opposition parties have voiced against GST, claiming that it will have a negative impact on the lower and middle classes in India.
This post aims to provide key insights into GST, its business impacts, and what steps companies should take to accommodate this new regime.
The GST Explained
The GST is the new service tax that has been implemented to overcome many years of complex, diverse, and irregular tax practices across India’s separate states and territories. A prominent tax provider service in India known as “ClearTax” defines the GST as a “comprehensive, multi-stage, destination-based tax that will be levied on every value addition.” These elements can be broken down into their separate components to simplify as to what this tax essentially accomplishes.
- Multi-Stage: The “multi-stage” element of the GST refers to the stages in the supply chain. This is essentially the process when raw materials are transformed into manufactured product, warehoused, moved to the retailer, and subsequently to customers as the final phase of the product life cycle.
- Value Addition: “Value addition” refers to the increased value that a product gains at each stage of the product life cycle. For example, if a manufacturer intends to produce a pair of cotton pants, first they need to buy the raw material. When that material is processed to turn into a pair of pants, it receives a higher value. When the pants are sent to the warehouse, a label is attached to it thereby increasing its value further. Subsequently, the value further increases when the pants are finally sent to the retailer and money is spent on marketing the pants.
- Destination-Based: A “destination-based” tax moves away from the old tax practice in India where an excise duty would be levied on manufacturing and a subsequent VAT (Value-Added Tax) to be levied on the other stages of the product life cycle. The new GST is now imposed at each point of sale. For example, if a product is manufactured in State A, but the final sale takes place in State B then State A receives the revenue for manufacturing. When the cycle is completed and the final sale takes place in State B, State B will receive the tax revenue for sale.
One of the key impacts of the GST is its capacity to eliminate the effect of cascading taxes on consumers. The cascading tax is applied to a product at each stage of the product life cycle. In turn, each seller in the supply chain will attempt to recover their losses due to the tax levied on them by the previous seller, building up at each successive stage until the final burden is finally shouldered upon the customer. The GST resolves this by allowing the individual parties of the supply chain claim credit for the taxes they are paying, effectively lowering the end cost for consumers.
The GST as a whole encompasses three different Goods and Services Taxes:
- CGST: Revenue is collected by the Central Government
- SGST: Revenue is collected by state governments concerning intra-state sales
- IGST: Revenue is collected by the central government concerning inter-state sales
GST Business Impact Chart:
|· Rate of Tax
· Time and Place of Supply
· Treatment of current incentives
Indirect Tax Impact Assessment
|· Revenue stream
· Procurement stream
· Costing, pricing, and working capital
· Availability of credit of GST
|· Operating model
· In-house v/s outsource
· Supply chain processes
· Working capital
Accounting and reporting
|· Tax credits, accounting, and payments
· Change assessment in accounting entries (including revised chart of accounts, compliance with Indian accounting standards, etc.)
|· System changes – ERP, EI tools, other technology tools
· Compliance – with GSTN requirements
· Getting systems ready for audit
|· GST registrations
· Tax credit transitions
· Return reporting
· Other statutory compliances
· Managed/Shared Services
|· Program planning
· Governance forums
· Deliver communications
· Drive project delivery
· Quality assurance
· Program integration
· Budget management
Change management and training
|· Enabling business engagement
· Facilitating business readiness
A couple of notable items that have special exemptions and/or delays under the GST are petroleum products and alcohol. Petroleum products such as crude, diesel, motor spirit, and natural gas are still not subject to taxation under the GST as the government approval is pending. Alcohol is also currently not taxed under the GST.
Fundamental industry takeaways for the new GST are as follows:
- Equip your departments to understand the finer points of the GST and its overall framework
- Understand how the new tax rates and its processes will affect companies
- Begin restructuring the company to accommodate the associated changes from the tax
- Measure the impact of the tax on the financial aspect of your business
- Re-conceptualize pricing strategies in accordance to the tax
- Bring company-wide departments in-line with the new IT requirements
Overall, the impact of GST will be transformational as it will affect every aspect of businesses right from the supply chain, technology infrastructure, financial reporting, tax, accounting, and others.
If you are planning to expand your business to international locations, we can assist you. Just drop us an email to firstname.lastname@example.org or dial +1-801-821-4905 to speak to one of our experts.