GST Opportunities & Challenges

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.

Conclusion

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.