India shall adopt a dual GST model which subsumes taxes at the central and state level.
By Kunal Chaudhary, Tax Partner, EY India
We have always heard that ‘Business drives tax, and not the other way round’. However, in the Indian context, indirect taxes have driven businesses to re-structure and model their supply chain, systems etc. owing to multiplicity of taxes and costs involved. India is at the cusp of moving to the GST regime, which is being seen as one of the biggest business reform as against tax reform.
India shall adopt a dual GST model which subsumes taxes at the central and state level. There shall be a CGST and SGST (intra-state supply), and IGST (inter-state supply). The major shift from the current tax structure will be the move from an origin based taxation to a destination based consumption tax. Thus resulting in big impact on business, compelling them to make changes to operations.
The distribution model, for example, shall require marked transformation under the new regime. Currently, most industries operate on a state warehouse model undertaking stock transfers to optimise tax costs (since inter – state sales are subject to non – creditable CST of 2%). However, under GST, inter-state sales as well as branch transfers shall be subject to a creditable GST. Therefore, many businesses may consider moving to a single warehouse model to reduce costs and hassles of having multi-state operations. This may potentially increase concentration of business in centrally located areas to facilitate the single warehouse model.
Under the new GST regime, the ‘appropriate state’ for payment of GST on supply of goods and services shall be governed by ‘Place of Supply Rules’. The impact for these rules is likely to be most acute for service providers, wherein the place of supply is based on location of service recipients for B2C supplies (such as mobile operators, banking, travel etc.). Companies currently discharging tax dues on a centralised basis would, under GST, need to have state – wise establishment, registration and undertake compliance.
From a credit perspective, in terms of the current law, VAT credits are state specific and CENVAT credit (excise duty and service tax) is centralised – cross utilisation is not possible. Manufacturers take credit with respect to the factory where inputs and capital goods are used. However, service providers can take credit on centralised basis of input services. Under GST, state wise credits would need to be maintained with no cross utilisation between CGST and SGST, and amongst CGST/ SGST of one state against CGST/ SGST liability of another state. Considering the proposed tax rates, GST costs are estimated to be significant for businesses and credit optimise would be important given the legal dynamics. Thus, in some cases, there may be a preference to decentralise procurements (services specifically) to prevent credit accumulation, whereas certain dealers may look at centralisation of procurements. Businesses shall need to accordingly restructure themselves to prevent credit blockages.
Currently, taxable events are varied such as manufacture for excise, sale for VAT/ CST, advance/ accrual/ invoicing for services. The taxable event under GST shall however be the supply of goods/ services and shall be determined in accordance with ‘Time of Supply Rules for Goods and Services’. This may require corporates to relook at their cash flow cycles due to the significant impact on working capital management.
There are certain trade practices prevalent in the industry structured to minimise tax leakages such as high sea sales, sale in course of import, in – transit sales. The intent behind these transactions is to reduce the non – creditable CST/ VAT costs in supply chain. The new GST regime could lead to these transactions being taxable, and likely to be creditable to the buyer. Businesses operating under these mechanisms may need to undergo changes.
The Central Government offers excise duty incentives based on area of operations such as in J&K, Himachal Pradesh, North Eastern States, etc. Similarly, the State Governments also provide incentive packages to promote industrial growth. This has led to a concentration of industries in such areas. It shall be pertinent to examine the fate of such benefits under GST and may lead businesses to reconsider their areas of operations.
What lies in the wings is a plethora of change management to manage GST in a better way and not succumb to the various challenges a new legislation could pose. The reach of GST is practically all encompassing – all areas of business operations shall be impacted – supply chain, ERP systems, working capital management, processes, contract management, pricing, human resource management. It is therefore imperative for India Inc. to brace themselves and ready themselves in a focussed and structured manner to align their structure and operations with the new GST law.
(Views expressed are personal)