Indian Goods & Service Tax: Proactive actions for Indian Inc.

By CA. Vinay Bhushan

“Proactive action is always the best approach to deal with challenging matters before they get out of hand”

Is Indian Inc. really ready to adopt Goods and Service Tax (‘GST”)? The answer of this question is really tough in the current scenario. Presently, Indian Inc. is bound to comply with multi taxes and sufferings in term of high tax cost. Short span of time provided to readjust and realign it business process will increase suffering further. How Indian Inc. can realign its business model, supply chains, logistics with in few month and how anyone can expect this!! Following are the few points on which Indian Inc. should act proactively on the new proposed GST model.

Business Strategy/Pricing Policy/Logistics

Impact of tax cost on pricing policy should be reviewed as per new GST rates on inputs/ final products. Options of backward and forward integration in terms of overall tax cost and efficiency may be explored.

Feasible study of inter state supplies or warehousing in terms of new valuation rules of goods and services would be the need of hour. Further, supply chain and distribution channels may need a review as per the new regulations.

First discussion paper on GST affirms few positions, like applicability of Integrated Goods and Service Tax (IGST) on inter state transaction, allowance of cross credit among goods and services, non allowance of credit among State GST and Central GST. Indian Inc. can evaluate the different feasible options and plan proactively the future course of action.

Abolition of Central Sales Tax (“CST’):

Revenue authorities are committed to abolish CST from April 01, 2010. On this auspicious day Indian Inc. would say good bye to CST and will welcome GST (may be delayed for further few months!!). Inc. engaged in manufacturing which are having presence on pan India basis needs adjustments/realignments in the supply chain due to abolition of CST. The cost benefit analysis of distribution cost vs. warehousing cost should be done to evaluate the tax impact on the products.

Statutory Concessional Forms:

Next action point for Indian Inc is the collection of statutory concessional forms. Form F (concessional form for branch transfer) may be the internal matter of the trade and easy to coordinate among the branches; will not pose as a big challenge. The bigger challenge is to collect Form C (concessional form for inter state sale). Proper strategy on coordination with the buyer would minimize the tax liability and future exposure.

Location Based Exemptions:

Inc. having manufacturing facilities in the state of Uttaranchal, Himachal Pradesh and availing location based exemptions need to review their business model. Present scheme of exemption may be adopted by GST in the form of first pay and then refund scheme. This scheme will definitely increase the working capital requirement of the company. Further getting refund would also require documentation and have administration cost. A study on the requirement of additional working capital would be required. Administration Cost Vs. exemption benefits should be evaluated to determine the best available option.

Export obligations:

Most of the export promotions schemes like EPCG, SEZ and EOUs are attached with export obligations, which are calculated as per the current tax rates. Inc. availing export promotions schemes should do a study of impact of the GST and need to re-calculate the duty obligation with respect to the export as per the new rates. Surety Bonds executed with the revenue authorities would require a suitable amendment in view of changed liability as per the applicable GST.

Changes in the ERP System:

GST will come with the new tax rates; new formats of the invoices, returns, challan would also be amended as per the GST requirement. ERP need to be amended in terms of the above changes. Accounting entries for GST would also be required to amend as per the new tax model.

Training of the Middle Management:

Management should be ready to adopt the changes in the minimum period of time. As per the discussion paper, each state will have its own legislation. However, uniformity on the broad issues has been assured by discussion paper. In light of changed legislations, rates, formats core tax team should be prepared and well trained.