Legislative delays will no doubt make the planned implementation date of April 2016 challenging, so businesses need to consider the areas that could be disrupted.
The Government of India first proposed that a number of indirect taxes levied on goods and services by the center and states be replaced by the goods and services tax (GST) a number of years ago. After several years of uncertainty, the GST project now seems truly underway, with a planned introduction date in April 2016. Now is the time for all businesses that operate in India to consider the impact of GST and start to prepare for the rollout.
“Businesses that are proactive in preparing for the GST early can gain a real competitive advantage by reducing disruption and maintaining and improving relationships with suppliers and customers alike.“
The scope of GST is anticipated to be comprehensive, covering virtually all goods and services supplied in India, with minimal exemptions. Therefore, GST will have a far-reaching impact on virtually all aspects of operations and infrastructure, including contractual arrangements; pricing; supply chain design; staff training; and IT, accounting and tax compliance systems.
While we await the outcome of deliberations and the final passage of the GST bill by the Parliament (expected to be in August 2015), legislative delays will no doubt make the planned implementation date of April 2016 challenging. The timetable may be modified to reflect these actions. But, in our view, the delay (if any) will be not be substantial, and GST implementation looks certain for 2016. Businesses should take full advantage of this period to be better prepared for the rollout of GST when it happens.
Lessons learned from Malaysia GST
Malaysia introduced a new GST on 1 April 2015. One lesson from the Malaysian experience is that complete awareness and proactive preparation will be of paramount importance in handling this huge tax reform effectively.
Malaysian GST is a fairly simple tax, with a single rate, and taxpayers had a great deal of advance notice of the law and rules. However, the reality for many businesses was that the rollout was far from seamless because of a lack of awareness and preparedness; the new tax led to business disruption, operational issues and delayed compliance for many.
We believe that one reason for this lack of preparation was that the GST had long been discussed and repeatedly delayed. A typical response from many businesses was “It won’t happen, so we will worry later,” but this attitude meant that affected taxpayers deferred taking the necessary actions until it was too late and then they faced huge challenges and disruptions in implementation.
In fact, the need for preparation may be even greater in India than in Malaysia. The Indian GST will be unique and far more complex than the Malaysian tax, with a dual GST regime and levy of GST on inter-state supplies of goods and services, including intracompany stock transfers.
Besides, the proposed design has additional 1% origin tax on inter-state supplies of goods outside the GST chain, which will be non-creditable. In addition, by the time we have a clear idea of the GST law and rules, businesses will be left with just 60 to 90 days for implementation if the planned date remains as April. If businesses wait to act until then, our experience suggests that preparing in time will be very difficult indeed.
Although the introduction of GST is a tax reform, it should be approached as a complete business transformation because it will have an impact on every aspect of the business.
The key areas of business for GST introduction include:
- Advocacy — tax policy discussions by industry sectors and individual taxpayers around issues such as the tax rate, the place-of- supply rules, the treatment of existing incentives and valuation
- Indirect tax impact assessment — the strategic and operational impact of GST on revenue and procurement streams, costing and pricing of products and services, working capital and cash flows, and transitional provisions for carryforward of existing credits
- Supply chain — operating model and network redesign across sourcing and distribution, contracting and process changes
- Accounting and reporting — tax credits, payments, changes in accounting entries (including revised charter of accounts in compliance with Indian Accounting Standards), and a risks and control framework
- Technology refresh — ERP and other system changes, GST reporting changes, system ready for audit and potential automation of GST compliance
- Compliance — GST registrations, tax credit transitions, return reporting formats and statutory compliances, explore shared service and managed outsourced services for GST compliance
- Program management — GST program planning across diverse stakeholders, program integration, budget management, quality assurance and timely communications
- Change management and training — enabling business engagement, training staff and educating suppliers and customers, and facilitating business readiness
All of the actions outlined in the list are integral to how GST will have an impact on your business and how smoothly the transition takes place.
Businesses that are proactive in preparing for the GST early can gain a real competitive advantage by reducing disruption and maintaining and improving relationships with suppliers and customers alike. Each action will require early planning and timely execution to leverage this advantage, including managing budgets, resourcing and the overall success of the project.
However, these critical activities will clearly require significant investment by companies while they continue to focus on running their existing business operations, making this task hugely challenging. In recent months, we have seen that some Indian companies have woken up to this daunting task and are getting prepared. We are now seeing serious engagement at the C-suite level, with many companies discussing GST at the board level, identifying GST steering committees and making them accountable for executing this transformation.
We welcome this level of engagement and encourage other companies to follow suit. Starting the GST process early will help businesses to leverage the opportunities that the new tax system offers, ensure timely compliance and avoid disruption and panic at the later stages as GST day one approaches.
Courtesy : Mark Houtzager is the principal consultant at US VAT, Inc. – providing Value Added Tax