March 09, 2017

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GST Opportunities & Challenges

- Abhishek Rastogi, Partner [ Khaitan & Co ]
- Ayush A Mehrotra, Principal Associate [ Khaitan & Co ]

Abhishek Rastogi, Ayush A Mehrotra

GST is a widely adopted consumption tax that promises to simplify indirect tax administration in India by unifying the plethora of taxes and levies imposed by the Central and state governments and allowing seamless credit throughout the supply chain in transactions pertaining to goods and services.

Keeping in mind the federal nature of our constitution, GST has been proposed to be a dual levy consisting of Central GST (CGST) and State GST (SGST) which would be appropriated by the Central and state governments, respectively. In case of inter-state supply, transactions would attract levy of Integrated GST (IGST) which would be equivalent to the aggregate of SGST and CGST.

Though GST has spurred much debate, discussions and prognostication and has become a ubiquitous part of our trade and commerce lexicon, the proposed regime essentially seeks to resolve the four major issues that are critical for the growth of the economy:

  • Creation of a one-market economy: The present legal framework permits the fragmentation of markets due to the differential treatment of intra-state and inter-state transactions. This, coupled with the several tariff and non-tariff incentive schemes offered by states to attract investments, resulted in the structuring of supply chain models based on the optimization of indirect tax costs rather than other economic factors and best practices.
  • Improved transparency with seamless input tax credit: GST is a value-added tax that will apply at each stage of value addition in a business value chain. However, to avoid any cascading impact, the regime would allow an input tax credit of the amount paid toward GST at the previous stage. This seamless credit availability is likely to improve the transparency between stakeholders (i.e., an assessee and authorities) and lead to the substantial simplification of compliances. In addition, the uniformity in classification and reduction in tax exemptions are likely to reduce classification disputes that are a regular cause of litigation between an assessee and the revenue department under the present regime.
  • Rationalization of cost of goods and services: With a unified levy and seamless input tax credit under the proposed GST regime, the government seeks to resolve the distortionary effect of multiple non-creditable taxes levied across the business value chain and helps in the reduction of associated costs.
  • Simplified compliance: The unification of several indirect taxes would substantially cut down compliances required in comparison with the present regime and reduce costs associated with them.

Though, conceptually, GST seeks to address uncertainties and distortionary effects of the extant indirect tax regime, it is critical that businesses and industries carefully map its impact to tread through this transitionary phase. While the much-awaited GST is conceivably expected to bring in a uniform experience as well as simplicity to the existing herculean system, a little introspection into the following key issues would give businesses a better insight into the ramifications of the proposed system:

  • Anti-profiteering clause: The revised Model GST Law (Model Law) as promulgated by the government has introduced an anti-profiteering mechanism. This has been introduced to ensure that the benefit of the reduced input cost on account of tax efficiencies is shared with consumers and not retained as excess profits. Though the anti-profiteering measure has been introduced with the pious intent of benefiting a consumer and controlling the inflationary impact of GST, it is likely that this may result in an “inspector raj” and excessive scrutiny of business policies.

    It would be relevant to highlight that the current Model Law merely prescribes the manner of enforcement without providing the manner in which a profiteering situation is to be determined. It is expected that detailed rules and regulations would be promulgated to ensure that the government does not end up disrupting the dynamics of the free-market economy under the garb of safeguarding consumer interests. Thus, while planning their transition to the GST regime, it is critical for businesses to assess the impact of such provisions to avoid any future dispute with revenue authorities.
  • Uncertainty regarding MRP-regime goods: Goods falling within the scope of the Legal Metrology regime are currently taxed on their declared retail or sale price under the existing Excise regime. For this purpose, the government provided abatement in respect of many goods to control the negative cost impact of Excise duty. With the Model Law departing from the MRP-based valuation in favor of a “transaction value” regime, it is critical that businesses involved in the manufacturing of MRP-regime goods undertake a thorough assessment of their cost impact. This issue is specifically critical for businesses involved in sectors such as retail, consumer goods, electronics, and automotive components.
  • Uncertainty regarding place of supply and place of provision of service: Though the Model Law attempts to provide a detailed list of situations and applicable regimes, some concerns still remain. For example, in the asset management industry, the local offices of mutual funds transact with investors and sign them up for investment, but the allocation of units in the respective mutual fund is undertaken by the headquarters, which may or may not be within the same state. The extant Model Law does not provide sufficient guidance on such unique transactions, which require specific provisions in consonance with the relevant trade practice so as to avoid any disruption to the sector.
  • Restructuring related party transactions: Departing from the existing principle of taxing the sale of goods or the provision of services by one person to another, GST would be charged on their supply. Accordingly, all intra-group or related party transactions, including those between the branches of the same legal entity, would now be chargeable to GST. Thus, it is critical that all intra-group or related party transactions are revisited in light of the proposed regime to undertake the necessary alignment in business practices to minimize the increased demands on working capital.
  • Valuation of stock transfers: Stock transfer of goods among different entities or branches of an enterprise is a common trade practice. In terms of the Model Law, stock transfers are to be taxed at the transaction value. Since in many cases, incomplete or unfinished goods undergo stock transfers for the captive consumption of related entities, the valuation of goods would have to be made in accordance with the computed value based on cost-accounting standards. This change in law mandates requisite diligence at the time of clearance cause to avoid any disputes with revenue authorities. To avoid this operational hardship for trade and industry, it is expected that a separate yardstick is provided specifically for the determination of value in the case of stock transfers. In this regard, it is also important that the relevant staff is educated thoroughly on the proposed valuation mechanism to avoid disputes and take informed positions.
  • Increased obligations for vendor management: In terms of the Model Law, it is necessary that the amount of input tax credit that is provisionally availed by a purchasing dealer matches the output tax liability discharged by a supplier. On account of this mandate for increased synergies between a vendor and purchasing dealer, it is apparent that contractual arrangements among parties would need to be revisited and that indemnity clauses would need to be appropriately reworded to cover all such risks. This is critical for ensuring diligent and timely compliance by vendors.


A conceptual analysis of the proposed GST reveals that most stakeholders, i.e., trade & industry, the government and ultimate consumers stand to gain with its implementation. However, since the move to GST is a paradigm shift in the manner of taxing transactions in goods and services, it is necessary that all aspects are examined by these stakeholders before its implementation.

From the perspective of trade and industry, the impending GST regime would trigger an inevitable transformation in business operations. This imminent shift to the new regime presents a strategic opportunity for trade and industry to restructure themselves in such a manner that their profitability and operational efficiencies can be improved. This, in our view, can only be achieved with detailed impact analyses and prior planning for the transition, which would also help in avoiding any prolonged disputes with tax authorities.

On the other hand, from a regulator’s perspective, it would be relevant that the new taxing mechanism is aligned to existing trade practices. This would not only ensure certainty in the implementation of policies but also help in avoiding any disruptions to trade and commerce. Therefore, the implementation of GST is the first step, and it would need to follow an involved process of dialogue among regulators, industry, and consumers to ensure that it meets the objectives that it proposes to achieve.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.

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