India: Transitioning To Goods And Services Tax (GST)

The introduction of Goods and Services Tax (GST) in India has evoked an unprecedented range of emotions such as excitement about the concept, curiosity about its impact on business, uncertainty about its effective date, apprehension about the manner of implementation and increased eagerness about the legal and political manoeuvres to transition to the GST regime.

Currently, through multiple rounds of discussions between the Central government, state governments and all stakeholders, a number of prerequisites for GST have fallen in place. The government has, set post GST Council meeting of 16 January 2017, set 1 July 2017 as the target date of GST implementation.

While the Finance Minister did not specify a definitive way forward in his Union Budget speech, he stated that the preparation of Information Technology (IT) systems for GST is on schedule and that extensive efforts to reach-out to trade and industry will start from 1 April 2017. The Finance Minister also mentioned that the government shall continue to strive to achieve the goal of implementation of GST as per schedule without compromising the spirit of co-operative federalism.

GST, which will replace the existing indirect tax structure in India, is expected to be more of a business reform than a mere tax reform. The impact of GST will be felt in varying degrees across business functions such as procurement, manufacturing, distribution, logistics, planning, sales and marketing, accounts and finance, human resources, to name a few. The structural changes under GST will have a direct bearing on working capital requirements, service-level commitments as well as procurement and warehousing strategies. Above all, the GST impacts product/service costing and business margins. Hence, GST is rightly believed to be a 'Game Changer' for Indian businesses. Businesses therefore, will have to plan the transition to GST in a scientific manner after carefully considering its nuances.

For an effective transition to GST, every business function will need to be assigned with responsibilities, including identifying changes in the accounting process, fixing pricing policies, ascertaining whether its vendors are GST compliant, restructuring of tax clauses in contracts and agreements. Credits disclosed in the existing statutory returns shall be carried forward in the GST regime if these credits are admissible under the new tax regime.

The following are some of the key activities that business houses should undertake for a smooth transition to GST:

Enrolment under GST

Taxpayers registered under any of the existing indirect tax laws namely, VAT, CST, excise or service tax would have to enroll and migrate their registrations for GST. This activity has already been initiated by the government.

Revisiting ongoing contracts

All existing and ongoing contracts which may entail the delivery of service/goods post July 2017, i.e. post introduction of GST would have to be revisited to ensure that such contracts are duly aligned with GST. These contracts should have appropriate clauses for statutory variation to mitigate any adverse tax implications.

Interaction with key vendors/ customers

It would be imperative to ensure that vendors and customers are in sync with what needs to be done under GST. This will be one of the key parameters for evaluating the GST impact on costing and business margins.

It is also important to note that, in order to ensure everyone is benefited by GST, the draft GST law contains anti– profiteering provisions to ensure that GST related savings are passed on to the appropriate stakeholders in the value chain and that the Tax Authorities are empowered to impose penalties in case of non–compliance.

Tax Efficiency and Optimisation

The Proposed GST Law lays down transitional provisions. It is necessary to go through these provisions to identify opportunities to improve tax efficiency and to optimise on the benefits arising out of GST. Furthermore, the revised model GST law also assures a seamless flow of credits, thereby resulting in a commensurate reduction in price.

Therefore, it would be worthwhile to re-visit existing tax positions to explore tax planning opportunities and mitigate exposures, if any.

Revamp of Information Technology Systems

Existing Information Technology (IT) systems must be modified to make them GST compliant. Right from maintenance of masters such as tax masters, vendor masters, customer masters to the generation of invoices, booking of expenses and revenue, auto-determination of tax codes to the generation of various reports the IT systems will require due attention.

Getting ready for compliance

The proposed model GST Law calls for three monthly statements and an annual return as a minimum requirement per state (i.e. minimum 37 returns per state). It also speaks of input credit matching. In all likelihood, compliance requirements are set to rise. Therefore, systems should be in sync with the new tax regime to generate reports that would enable timely compliance.

Training

Training internal and external stakeholders would also be vital for the GST transition which will go a long way in ensuring that the effect of GST is correctly given and that compliances requirements are being met with appropriately.

Thus, business houses will have to devise appropriate strategies to move towards GST in a seamless manner. The changes required across business functions will need to move in tandem in order to ensure that the organisation as a whole is GST ready.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.