Goods and Service Tax (GST) - Efficient indirect tax system

[Swati Dodhi]

Goods and Service Tax (GST)

As the introduction of the Goods and Service Tax (GST) gathers momentum, the businesses in India have started bracing themselves. GST, which is likely to subsume most of the current indirect tax levies, is expected to be the most efficient indirect tax system in India.

GST would be a single comprehensive indirect tax to be levied on goods and services. It would be levied at every production and distribution leg with the eligibility to claim set-off of most indirect taxes on procurement leg. Under the current regime, there is a fractured credit mechanism; businesses don't get credit for all the taxes they pay.

For instance, Central Sale Tax (CST) paid on inter-state procurements cannot be availed of as credit; a service provider cannot claim credit of input Value Added Tax (“VAT”); similarly, a trader is not eligible to claim credit of input excise duty or service tax. Under the GST regime, no distinction would be made between a manufacturer, trader and service provider; GST would apply uniformly to all. Further, a taxpayer would be eligible to claim credit of all the indirect taxes paid on the procurement leg - be it goods or services; be it intra-state or inter-state procurements.

SUPPLY-CHAIN STRUCTURE

Most of the businesses at present structure their supply chain to mitigate the overall tax burden, but many a times such supply chain result in enhanced logistics cost. For instance, to avoid the burden of CST, the businesses open distribution centres in all the States, which lead to additional logistics cost.

With the introduction of GST, the businesses may re-define their supply chain and structure the same in a most economic and efficient manner without worrying about the indirect taxes - for example, the businesses may not need to open distribution centres or warehouses in each and every State; they can operate from a place most convenient for their business from a commercial perspective. This would not only allow the businesses to save the inventory and warehousing cost but would also reduce the unwarranted compliance requirements under indirect tax laws in each and every state.

LOGISTICS COST

The reduction in the overall costing of the taxpayer and the free flow of credit across the supply chain may require the taxpayers to re-visit pricing of their goods and services to stay competitive vis-a-vis their rivals.

This would require every business to re-evaluate and compare the procurement cost under the current regime vis-a-vis under GST; effect of taxes on the overall costing; effect of taxes under the proposed GST regime and then decide the revised pricing strategies. From an overall tax cost perspective, the indirect tax cost on goods (which under the current regime is around 24 to 27 per cent cumulatively for excise and VAT) would reduce to 16-20 per cent; whereas, for services, the cost of tax would go up from 10 per cent currently to 16 per cent under GST. Besides the fact that GST is likely to have an impact on the pricing of goods and services, the cash flow of businesses may result in favourable swing.

Unlike the current regime, no input tax would become cost under GST and could be set-off against the output tax liability instead of cash payment.

REVAMP OF BUSINESSES

GST would not just require the businesses to re-define the supply chain but also to re-design their accounting and IT systems. The transformation would require the businesses to revise the formats of invoices, purchase/sales registers, stock registers, reporting declarations to factor the changes under the GST regime. The IT systems would have to be reconfigured accordingly.

Taken as a whole, GST would require a thorough and systematic revamp of the current business models, namely, re-designing the supply chain, defining new business strategies, revising pricing strategies, change in the documentation and accounting systems, reconfiguration of the IT/ ERP system, training of employees, and so on.

Most of the businesses have already started work to re-align their processes to ensure a smooth transition into GST, instead of struggling with the same at the eleventh hour.

It is now up to the Centre and the State Governments to rise above their vested political interests and fast-track the introduction of this much-needed (and now much delayed) indirect tax reform.