First published in August 2016

Important facts you should know

Parliament clears Constitution Amendment Bill for GST

On August 3rd 2016, India’s Rajya Sabha (Council of States) passed the long awaited GST constitution bill (122nd Constitutional Amendment Bill), and plans to implement the new tax by April 1st, 2017. In addition, the GST bill on Monday has been unanimously cleared by the Lok Sabha (House of Commons). Now it has to be ratified by at least 16 States to become effective. It is one of the most significant reforms under the Modi Government. Narendra Modi called the passing of the Bill a historic step which was the decision of a united India and which will also support economically weaker States.

What exactly is GST?

GST is a value added tax (VAT) on Goods and Services and will be levied at all points in the supply chain.

Why is GST so important?

The tax is supposed to create a common Indian market.

Until now, the tax system for Goods and Services is a mix of State and Nation-wide taxes. This means taxes and duties collected differ between States, makes transfer of goods between States very complex and made India’s tax system especially difficult for foreign companies who want to trade because you need to understand all the complexities even if you only have a few products to sell in each state. This new tax should end the complex State and Central Tax system as it will replace all this with one tax for almost all Goods (a few are not on the GST list). This tax will also ultimately benefit consumers who nowadays have to pay differing tax rates on any Good or Service.

The advantages of GST

GST will:

  • create a wider tax base and a more efficient tax system
  • eliminate the cascading or double effects (tax on tax) of applying taxes
  • rationalize the tax structure
  • convenient offset process
  • simplify compliance processes in India

What taxes will be subsumed under GST?

GST

What taxes are not part of GST?

Import taxes, such as the Basic Customs Duty, as well as the Research & Development Cess for Technology Imports (under discussion), Stamp Duty and taxes on specific products and Services, such as tobacco, electricity or alcoholic beverages, will remain. Additionally, the necessity of Road Permits for interstate movement of Goods, is still under discussion.

What will really change under GST?

The new GST will change the tax structure, tax incidence, tax computation, tax payment, compliance, credit utilization and reporting, leading to a complete overhaul of the current indirect tax system. It will also have effects on all aspects of business operations in India. The Central and State Governments would levy GST in parallel on supply of goods and/or services where such supply is made within the state. The GST to be levied by the Centre would be called Central GST (CGST) and that to be levied by the States would be called State GST (SGST). An Integrated GST (IGST) would be levied on inter-state supply of goods or services. The import of Goods or Services would be treated as inter-State supplies and would be subject to IGST in addition to the applicable customs duties. However, the final structure of GST is not yet set.

Will all the changes of GST be good?

The tax will have positive impacts on some sectors but negative ones on others – mostly Services – where the new single tax will actually increase the duties paid. Companies that until now only paid Service Tax will now also need to pay an additional State specific authority tax.

When does GST come into effect?

The Government has set a GST Roll Out Date of 1st April 2017 to implement the whole system.  As there is so much to do in the coming months that many experts think the deadline may undergo revision.  The first real test of this deadline will be in December 2016 when all the common modules for the processes required need to be in place for the first 17 States. These modules will clarify many details about the processes, and implications and efforts to develop these processes are likely to be very complex.

What does GST mean for my business?

All companies will have to prepare themselves for the introduction of GST. Firstly by checking which of the taxes on the Goods they want to trade or are trading in India falls under subsumption list of the GST – OR Sales and Excise Taxes will still be levied on those products. Some Goods are not covered by GST, thus as mentioned above, taxes for services will change.

Key business impacts will appear in the areas of:

  • Sourcing: Inter-state buying could prove feasible and may open opportunities to consolidate suppliers and vendors
  • Distribution: Changes in tax system could change in procurement and distribution, network structures and product flows may need reviewing as current arrangements for distribution of your finished goods may not be optimal with the removal of the concept of Excise Duty on manufacturing
  • Cash flow: The removal of Excise Duty on manufacturing can result in improving cash flow and inventory cost
  • Pricing & profitability: Tax savings resulting from the GST structure will require new pricing of products
  • System changes and transaction management: Many systems and processes will need to change to make the optimal transition to GST – and these will require training for employees, checks to ensure compliance under GST, customer education, and tracking of inventory credit to ensure everything goes smoothly; supply chain reports need to be reviewed and existing open transactions and balances as on the cut-off date need to be migrated out to ensure smooth transition to GST

Conclusion

Overall GST will bring more transparency and simplify the current tax system in India, but it will also require a lot of work to implement, at national level, in each state, and in each individual company. Eventually, it will harmonize Centre and State tax administrations. Even though there are doubts that the Bill will be implemented in April next year, experts are positive that 2017 is a realistic target for the Bill getting realized and effective.

Please contact us if you need more information about GST in India!