We are living in a federal government system in India where Centre and State both have their own powers and policies. Having a tax structure where there are multiple taxes, levies, cesses, etc. with a number of ambiguities on various fronts whether in classification between goods and services or location i.e. ‘from’ and place i.e. ‘to’ of supply etc. and the leakages in the tax collection, it makes the tax structure a cumbersome one for the system and the people. To the rescue is the proposed tax system i.e. GST, Goods and Services Tax, which implies one tax, one levy.
The first question arises whether GST will come or not and if yes, then when? Last year September 2016, Supreme Court rejected the taxes which were applicable earlier thus leaving the government with two choices either to let the current taxes prevail for maximum of 1 year after which it won’t be able to collect taxes from the public as per the law or it can implement GST as per the provision within this 1 year. As per the announcement, it will start from July 1, 2017 and if by any chance the government won’t be able to do so, it will have to implement it by mid-September 2017 else it will not be able to collect tax revenue which is the highest source of income for any country which any government can’t afford.
There are 3 Components of GST, that is, IGST which is implemented for transactions between any two states, CGST which covers all the previous central levies like Excise Duty, Service Tax, CST, CVD etc. under its singe umbrella and SGST in place of all State levies like VAT, Entry Tax, Purchase Tax, Entertainment Tax, Luxury Tax, etc. which are implemented for transactions within a state. Another question that may arise is that the SGST, CGST, IGST can be seen as a replacement of State tax, Centre Tax, VAT, etc. and thus it may fail the very purpose of GST as one tax, one levy. In fact, the countries with successfully implemented GST have it as single component. However, the benefit is that the input tax credit can be availed in GST format in furtherance of transaction which was absent in prevailing tax system where tax keeps on compounding except the excise duty where benefit was available to people at succeeding stage.
There are various aspects that are noteworthy with respect to the changes in the tax system and the impact. In GST, there is no concept of Centralized registration. Pan based GST registration is required for each state where taxable supplies are made. Thus, the businesses having operating offices in various location needs to make multiple registrations. Registration is mandatory for aggregator turnover of Rs. 20Lacs in a financial crisis year and Rs. 10Lacs in case of North Eastern States. Also, there will be increased burden of compliance as required to file Returns each month and TCS i.e. Tax collection at source. Also, tax is applicable on Transaction value instead on MRP. For invoices, a proper serial number (alphanumeric, numeric) will be followed and no multiple series can be used. In addition, all the invoices will be validated by the returns aiming to clean up the system.
Some of the other impacts it may have includes the SEZ working capital issue that would incur since tax exemption is going to be converted to refund. E-commerce operators might have to face various challenges starting with the sellers leaving because of reduced margins. High return or cancellation rate and COD may result in e-commerce operators to deposit tax from their own capital. Working capital issues will also incur since vendors operating on very thin margin may end up in refund situation. There are numerous benefits under GST like while opening warehouse, etc. businesses don’t need to consider which state has less tax, etc. For check posts, no entry tax, no separate challan is needed. However all are draft rules as per the latest November draft available where it is expected that most of these rules will prevail as cited. There are still some ambiguities which will be cleared once the final law and rules will be declared.
The Government is saying we are ready but it is really so? Do we have the Infrastructure, IT system, trained resources? 90% IT vendor solutions are rejected in the test run by experts. Business will have to analyse the impact on Finance and Taxation, Accounting and IT system, Business Strategies and Policies, Business Process and methodologies. The Implementation strategy includes preparing a plan for effective flexible transition, identifying and forming core team, impact analysis, identifying gaps, implementing changes for IT to handle requirements under the GST regime, having SOPs in place and conduct trainings. When GST was implemented in Malaysia, no trader was able to issue any invoice for the first 14 days. In effect, it may turn out to be a major havoc than demonetization in India.We have approximately four months in our hands. If we make our best effort we can do it.
GST is an attempt to remove cascading of tax, widening of Tax base and bring transparency in Tax Administration through Automation. But it’s India and people will find a way around and indulge in unfair means for their own benefit. The appeal to everyone is to help clean up the system and let’s have a fresh start. However, initially every change is difficult but those who unlearn and relearn faster always come out as a winner.