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India: Indian GST creeps ever closer

In a significant development signalling the onset of radical reform in India’s indirect tax landscape, the lower house of the parliament (Lok Sabha) passed during the first week of May the Constitution Amendment Bill 2014 (‘the Bill’) to enable the introduction of goods and services tax (GST). Prashant Deshpande of Deloitte explains how the Bill’s passage was a milestone event which is set to provide impetus to the government’s aim of rolling out GST in April 2016.

The Bill seeks to empower both the centre and state with the concurrent taxing jurisdiction over 'supply of goods or services or both' and will provide the foundation for framing the law and getting the administration ready for the changes that this reform proposes.

GST will transform the way businesses function and the government appears resolute that it should meet the April 2016 deadline. If that is to happen, it will be imperative for the industry to be prepared for the challenges of transition.

Every business function will be impacted by the introduction of GST and this will require an overhaul of business processes. Mapping of different business functions and processes and assessing the impact of GST is an essential first step in order to be prepared for the transition. The more planning the more likelihood of successful outcomes. With the approval of the Bill, the next step that a business needs to take is to focus on the areas likely to have substantial impact.

Re-engineering supply chain management

GST will impact the entire supply chain and will require a review and perhaps realignment of the 'plan, procure, make and deliver' processes. For instance, presently, the levy of the central sales tax, a non-recoverable tax on inter-state sale, encourages a supply chain set up wherein companies set up warehouses in different states under a 'stock transfer and sell' model to limit the incidences of taxation that could apply. With the introduction of GST, fiscal barriers to inter-state sales should be eliminated and the transition to the new tax should thus pave the way for an efficient procurement and distribution pattern driven by optimum access-to-market rather than by preventing adverse tax consequences.

Re-evaluate the working capital requirements

Working capital is considered to be the lifeline to any business and the introduction of GST will most certainly require businesses to re-evaluate their working capital requirements. For instance, presently, a stock transfer made by the company to its branch is not considered a sale and so is not subjected to tax. However, post-GST implementation, nearly every transaction that can be considered a 'supply' of goods or services is potentially subject to GST. Even though in most cases the tax paid in this context will be recoverable by the business by way of credit mechanism, the initial outflow of cash will affect working capital. Similarly, with the rate of GST expected to be much higher than the existing rate of service tax, a recipient of services could be required to initially pay a higher amount of service tax (albeit subsequently recovered if eligible), thereby creating higher working capital needs in the interim.

Assessment of pricing policies

GST aims at rationalising the tax content in the product price and minimizing the tax leakages. This will inevitably impact pricing. Further, realignment of supply chain is expected to influence the logistics and manufacturing costs. A detailed analysis of overall impact will be needed to ascertain the impact that GST will have on pricing policies.

Reviewing current contracts

Taking appropriate steps for restructuring of existing contracts on account of change in taxability, change in pricing model, change in delivery or supply model and so on would be an absolute imperative. As is a review of existing contracts expected to be ongoing post the introduction of GST to check for flexibility to factor the changes in rates of taxes and law.

In certain types of contracts which are performed in more than one state, the amount pertaining to supply of services in each state may be determined in proportion to value of services. Therefore such contracts may require a revisit to enable correct determination of the tax liability.

Customising ERP system

Another area of business that may require immediate attention is addressing the information technology by redesigning the ERP system for tax determination, compliance and reporting. Most businesses are equipped with some form of ERP system. At the very least, changes will be required to be made for tax determination configuration, master data, forms and reporting outputs and integration with tax authority portals. Transformational changes in supply chain and organisational structure to reflect the benefits of the reform may also require additional ERP system changes. Thus, customising IT systems will require advance planning to avoid business disruptions during implementation.

Compliance and documentation revamp

There will be a paradigm shift in the way tax compliance processes operate under the GST regime. With the expected synchronisation of reporting requirements for central and state filing, use of integrated information technology could further ease the compliance burden. There will also be an immediate need to review documentation and record requirements under GST; for example as regards invoicing requirements, maintenance of records and registers, preservation of records and so on. Businesses will need to appropriately assess existing processes and get ready for new procedural and compliance requirements.

Even a cursory look at the areas requiring attention before GST is implemented suggests that there is much to do in relatively little time and the clock is already ticking.

A proactive approach to preparing for GST increases the prospect of identifying and mitigating the risk areas and at the same time seizing opportunities for cost effective and efficient operations. Effective implementation of GST requires multiple disciplines within an organisation to work together in a seamless manner. Prompt action in planning for GST will enable the businesses to have a well thought-out plan of action and should minimise unnecessary rush and the risks that brings.

Prashant Deshpande
Deloitte India

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