GST: Short-Term Pains; Long-Term Gains
Goods and Services Tax (GST) is a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India to replace taxes levied by the central and state governments. GST will be one of the biggest tax regimes of India evoking change management challenges at the Central and State Government and the Businesses and general public. There is a lot of anxiety over the final verdict, implementation date, rationalization of rates and inflation on Services and some specific products due to rate shift.
For a common man, who is on the receiving end, the biggest concern is inflation. The Business establishments have already started working on their expense ratio, re-modeling the supply chain, reviewing cash flow cycleto keep the Working Capital and Performance Results in the best interest and hold on to their competitive pricing structure & to retain their market share. On closely reviewing the proposed rates, the prices for many products and services will go high and this could potentially result in higher inflation. Not to forget, there is a big chunk like petroleum products, alcohol and real estate which is kept aside for the moment from the GST preview, due to its complexity.
62% of the Industry has shown unpreparedness based on the survey done by CNBC TV18. Some of the major issues which the industry body had highlighted are as follows
a. Multi-location service providers such as banks, telecom operators, airlines and insurance companies are staring at huge compliance burden with the Goods and Services Tax (GST)
As they need to setup branches in every state to claim input VAT Credit as compared to the current centralized operation. Under GST, they need to get registered in 20 States and file close to 740 returns in a year
b. Primary sales sentiment is very low as the partners are unwilling to stock in June because of the GST which is resulting in increase of prices for most of the goods and not a good sign for product vendors as the compensation is only 40% on the transition stocks
c. 4 GST slabs for a similar product line is confusing and might deter innovation as entrepreneurs tend to focus on the products with lower taxes
d. The Central GST Bill, 2017 allows the central government to notify CGST rates, subject to a cap. This implies that the government may change rates subject to a cap of 20%, without requiring the approval of Parliament.
e. Current goods and services are taxed at different rates across states owing to geographic, economic and cultural reasons. For example, coconut oil is taxed in Kerala at 5%, while in Uttar Pradesh, it is taxed at 12.5%., Therefore, taxing each good and service at a particular rate will be a complex exercise as they cannot simply be moved to the nearest slab rate
f. Taxes are accrued at the location of the company not in the consumption state for Example: ABC Company located in Bangalore whose head office is in Delhi and advertises in Mumbai for Maharastra audience. The taxes here still get accrued in Bangalore not in Mumbai.
g. Price benefit might not be passed on the customers as company or a group of companies could collude together to rig prices
h. The rationale behind sharing un-utilised money in the GST Compensation Fund with the Centre and among states being different from Finance Commission formula is unclear
i. The basic design, operational & infrastructure issues to process more than a billion bills must be addressed by the government to ensure the smooth implementation of GST
j. Ecommerce is a boon for housewives & people from smaller towns to sell directly to the end customer sitting at their homes. The local registration for claim input GST credit will increase the prices of their goods and might make them uncompetitive.
Let’s take a look at some of the brighter side of this implementation.
For instance, Singapore saw a spike in inflation during the implementation phase and the Government took pragmatics step to moderate the price movements after imposition of tax. And most countries in the world have effectively sailed through the tide and have reached a stable tax phase.
Over the last couple of years, the experts have reiterated that GST implementation will boost the economy and GDP growth by 1% to 2% and in the long run will attract more goods and services in the tax preview, reduce tax evasion. The other proposition is that GST will ultimately result in free flow of goods and services across state borders. This could transform distribution model and supply chain of the Businesses. The existing tax model compels the businesses to operate on the state model to avoid inter-state transfers incurring CST (Central Sales Tax). However, in the new GST model, the branch transfers and inter-state sales will be subject to creditable GST. This will encourage businesses to move to a centralized warehousing approach resulting in effective costing. However, under GST, the businesses need to have state-wise registration, establishment and undertake compliance, maintain State-wise credits but with no cross utilization between CGST and SGST. Business need to restructure their supply chain to ensure effective credit utilization and avoid credit accumulation.
Some of the benefits include:
a. GST will replace 17 indirect tax levies and compliance costs will fall
b. State Central revenues will get a boost as the input tax credit will encourage suppliers to pay taxes
c. India will become a single market and Goods flow free across the country.
d. Make in India products will become cheaper because of the input tax credit with the new GST regime. Manufacturing will become competitive with the elimination of interstate tax & uniform market
e. State restrictions and levies have complicated ecommerce. Some sellers do not even ship to particular states. All this will end with GST
f. The spending will increase on IT infrastructure & uniform investment is expected to happen across all States.
Immediate challenge for the commoners & to the industry is that Prices have already gone up in June because of the lower intake of inventory. The government must compensate atleast 75% of the duty on the transition stocks instead of existing 40% or else must expect a June washout which is not good for businesses.
So, all of this would ask for an effective Change Management to manage GST in a better way and not fall prey to the challenges posed by the new legislation. Change is never easy and smooth!!! As quoted by Catherine Adenle, the lifeblood of any sustainable change is Vision, Motivation, Knowledge, Action plan and Resources.
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