GST: An idea whose time has come

Business Sphere - - GST - NATION TAX MARKET - By Our Cor­re­spon­dent

We are now just days away from the roll­out of the goods and ser­vices tax (GST) on 1 July—the most am­bi­tious in­di­rect tax re­form ever at­tempted in mod­ern In­dia. Yes, the de­sign is far from per­fect (given the mul­ti­plic­ity of rates), yet it is a vi­sion­ary idea on which, amaz­ingly, there is po­lit­i­cal con­sen­sus—some­thing so rare, given that, like the rest of the world, In­dia too has tran­si­tioned to a bi­nary dis­course. This game chang­ing mo­ment is best summed up in the im­mor­tal lines of Vic­tor Hugo: “Noth­ing is more pow­er­ful than an idea whose time has come.” Why so? First, it will eco­nom­i­cally unify the coun­try. At the mo­ment, po­lit­i­cally In­dia is united but op­er­ates as 32 in­de­pen­dent eco­nomic ter­ri­to­ries, im­pos­ing a range of taxes and levies as the goods move through the coun­try caus­ing a cas­cad­ing of taxes. Not only will this end the dis­ec­on­omy in­duced by deal­ing with sov­er­eign re­publics to con­duct busi­ness, mak­ing the coun­try more com­pet­i­tive, it will also re­in­force the po­lit­i­cal unity of In­dia—some­thing that has al­ways been threat­ened by ex­ter­nal in­flu­ences. Sec­ond, flow­ing from the above, the im­ple­men­ta­tion of GST will re­order the ex­ist­ing fed­eral polity. The for­ma­tion of the GST Coun­cil, de­scribed as In­dia’s first fed­eral in­sti­tu­tion by Jammu and Kash­mir fi­nance min­is­ter Haseeb Drabu, was the first step. For most of In­de­pen­dent In­dia’s his­tory,

the coun­try has come to ac­cept a strong Union gov­ern­ment dic­tat­ing eco­nomic gov­er­nance to the states. All this has changed. Ever since the cre­ation of the GST Coun­cil, the fed­eral eco­nomic re­la­tion­ship has be­gun to al­ter. This is largely be­cause GST would not have been pos­si­ble with­out a pool­ing of sovereign­ties—the Union and state gov­ern­ments have com­pro­mised on their in­di­vid­ual tax­a­tion pow­ers for the larger global good of In­dia. It has sown the seeds of gen­uine co­op­er­a­tive fed­er­al­ism. The new tem­plate is akin to a three-legged race: united they stand, di­vided they fall. Third, by its very de­sign the GST will put in place an au­dit trail, a pre­con­di­tion to a rules­based regime. The de­mon­e­ti­za­tion of high value cur­rency notes last year put the spot­light on the cash econ­omy. The in­tro­duc­tion of GST re­it­er­ates the in­tent of the coun­try to tran­si­tion to a less-cash econ­omy or at the least an econ­omy in one which there is a clear record of the trans­ac­tion trail (ex­actly why some sec­tions of traders are un­happy). This is a big leg-up for ef­forts to end the ex­cep­tion-based regime fall­out of which is crony cap­i­tal­ism. Fourth, the fit­ting of var­i­ous goods and ser­vices in the tax slabs, re­flects a con­tem­po­rary con­sump­tion trend. It is a tacit ac­cep­tance of the fun­da­men­tal trans­for­ma­tion of con­sump­tion habits in the coun­try. For in­stance in the 1990s, the cell phone was a sign of af­flu­ence, to­day about 300-400 mil­lion peo­ple use a smart­phone and the bal­ance 500 mil­lion own a ba­sic cell phone. The 2011 Cen­sus showed us that the In­dia had ma­te­ri­ally traded up; ab­ject poverty is no longer the de­vel­op­ment chal­lenge, in­stead, as the mid­dle class bur­geons, it is in­equal­ity. The in­com­ing in­di­rect tax regime ac­knowl­edges this new sta­tus of the mid­dle class. Fifth, and fi­nally, the process through which the GST was laid out serves as a new tem­plate for po­lit­i­cal dis­course. In what is a seem­ingly con­fronta­tional en­vi­ron­ment the GST Coun­cil passed ev­ery de­ci­sion with con­sen­sus, de­spite test­ing mo­ments? It demon­strates the will­ing­ness of In­dia’s po­lit­i­cal par­ties to forge con­sen­sus for the sake of na­tional in­ter­est. To sum up then, the im­ple­men­ta­tion of GST would be the mo­ment when In­dia hits the re­set but­ton. Now all eyes are on 1 July.

Eight things that busi­nesses need to do be­fore GST

GST is less than a week away. ET brings a last minute check-list by PwC of all the things that busi­nesses need to do.

GET REG­IS­TERED FOR GST Un­der GST laws, en­ti­ties sup­ply­ing tax­able prod­ucts and ser­vices need to be reg­is­tered in all the states from which these will be sup­plied. An en­tity al­ready reg­is­tered in a state un­der any ex­ist­ing law should be mi­grated to the GST regime. Un­reg­is­tered en­ti­ties will have to get reg­is­tered in the spe­cific states from which sup­plies are made. The win­dow for this is likely to open from June 25 for a month or so. GEAR UP IT SYS­TEMS TO IS­SUE IN­VOICES FROM DAY 1 IT sys­tems will need to be read­ied, and all the req­ui­site changes made, to is­sue in­voices from the first day of the GST regime. In­voice for­mats will have to be amended as soon as pos­si­ble. More­over, ac­cord­ing to GSTIN re­quire­ments, cus­tomer re­lated data as well as tax codes and con­di­tions (used to com­pute tax on ev­ery trans­ac­tion) will need to be up­dated in IT sys­tems and con­fig­ured to gen­er­ate re­ports re­quired for GST. TRAIN YOUR TEAM AND STAKE­HOLD­ERS It is im­per­a­tive that all em­ploy­ees and sup­ply chain part­ners, such as ven­dors, distributors and C&F agents, are trained well on amend­ments in the law. And since the GST law en­vis­ages seam­less pass­ing of credit of taxes only on sup­pli­ers’ com­pli­ance with its re­quire­ments, it is im­per­a­tive that all stake­hold­ers are ap­pro­pri­ately ed­u­cated on com­pli­ance-re­lated re­quire­ments. FI­NALISE YOUR TAX PO­SI­TIONS Sup­ply of goods or ser­vices will at­tract tax in the GST regime. Credit pro­vi­sions will also see changes. In ad­di­tion, if a com­pany is reg­is­tered in dif­fer­ent states it will be treated as a dis­tinct en­tity for levy of GST. There­fore, con­sid­er­ing the quan­tum of changes, each trans­ac­tion un­der­taken by a com­pany will have to be iden­ti­fied sep­a­rately, ir­re­spec­tive of whether GST will be ap­pli­ca­ble for it or not, in or­der to de­ter­mine the tax treat­ment of the trans­ac­tion. Af­ter the manda­tory tax treat­ment is de­ter­mined, the trans­ac­tion will need to be con­fig­ured in the en­tity’s IT sys­tem. RE­VISIT AND UP­GRADE YOUR BUSI­NESS PRO­CESSES From tax­a­tion be­ing im­posed on the man­u­fac­ture or sale of goods and pro­vi­sion of ser­vices un­der the present sys­tem, it will move to GST be­ing levied on sup­ply of goods and ser­vices. In ad­di­tion, there are var­i­ous other pro­ce­dural amend­ments, such as self-in­voic­ing in the case of pur­chases made from un­reg­is­tered ven­dors, re­ver­sal of credit in the case of non­pay­ment of con­sid­er­a­tion for goods, etc. Such amend­ments in the law will ne­ces­si­tate sig­nif­i­cant changes in var­i­ous busi­ness pro­cesses and it will be nec­es­sary for en­ti­ties to as­sess the im­pact of these and change the pro­cesses, wher­ever re­quired. AMEND YOUR CON­TRACTS WITH VEN­DORS AND CUS­TOMERS Un­der the ex­ist­ing in­di­rect tax regime, a cor­re­la­tion be­tween the lo­ca­tion of re­ceipt of in­put ser­vices and for re­ceipt of in­voices for such ser­vices at any lo­ca­tion in In­dia is not re­quired. In the GST regime, since the credit pool for ev­ery state will need to be main­tained sep­a­rately, it will be nec­es­sary to en­sure that an in­voice for in­put ser­vices is re­ceived at the place where credit of such ser­vices is el­i­gi­ble. This will need an anal­y­sis of pro­cure­ments of ser­vices and amend­ment of con­tracts with ser­vice providers, where re­quired. Sim­i­larly, con­trac­tual terms with cus­tomers will have to be re­assessed and re­vised, if needed. DE­TER­MINE YOUR PROD­UCT PRIC­ING EARLY At present, the mar­gins of sup­ply chain part­ners such as distributors and re­tail­ers are com­puted on the as­sump­tion that they are only li­able to pay VAT on their sale price. Go­ing for­ward, sup­ply chain part­ners will also be re­quired to pay GST on their sale price, and ac­cord­ingly, their mar­gins will need to be re­com­puted due to the changes in tax rates and avail­abil­ity of cred­its. And in ad­di­tion to re­vised mar­gins for sup­ply chain part­ners, the im­pact on tax cred­its and move­ment in the tax rate along with the anti-profiteering pro­vi­sions un­der GST will re­quire com­pa­nies to re­set the prices of goods or ser­vices sup­plied by them. There­fore, they will need to de­ter­mine the over­all im­pact of the new tax­a­tion regime on their busi­nesses be­fore tak­ing any de­ci­sions on pric­ing. CLAIM CREDIT FOR TAXES IN TIME The GST law pro­vides for car­ry­for­ward of ac­cu­mu­lated tax credit as well as for claim­ing credit of var­i­ous taxes paid on stock in hand (which can­not be claimed at present), sub­ject to ful­fil­ment of the pre­scribed con­di­tions. Fur­ther­more, for carry for­ward of their VAT credit bal­ance, tax­pay­ers will have sub­mit their sales tax dec­la­ra­tion forms or cer­tifi­cates in Form C, Form F, Form H, etc., as ap­pli­ca­ble, wher­ever they have claimed ex­emp­tion or a con­ces­sional rate of CST on such sales. But rel­e­vant dec­la­ra­tion forms or cer­tifi­cates have not been sub­mit­ted to the au­thor­i­ties till now. So there is an ur­gent need to ac­cel­er­ate sub­mis­sion of these forms — sooner rather than later!

Kash­mir Fi­nance Min­is­ter Haseeb Drabu

Arun Jait­ley, Min­is­ter of Fi­nance

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