India Inc. on 3 things to do for smooth GST roll-out...

As India ushers in the biggest tax reform witnessed since Independence, it is crucial to evaluate the nation’s readiness for the new Indirect tax regime.  With more than 80 percent of India’s existing taxpayers having successfully migrated to GST, it may be overly critical to say that the country is not ready.  The key industry players have been working since the past 12-15 months towards a successful GST implementation and are at a reasonable stage of readiness.  Albeit it needs to be acknowledged that few sections of the society not equipped with sufficient resources are still struggling to gear themselves with the fresh regime. The industry, at large, seems to be in a welcoming mode for GST, even though one would agree that the overarching public opinion with regards to GST is that contrary to the declared intent, GST would make things more complex rather than simplifying them. 

In the initial few months of GST implementation, companies do expect significant challenges with respect to effective delivery by various re-aligned IT systems and continuous changes required in processes and systems on account of the law evolving each day. It is also highly expected that many sections of the industry may not be fully compliant with various requirements of GST law from Day 1 itself and would require a transitioning period of few months post go-live date. This struggle is aggravated on account of the fact that for certain period of time, the companies will have to run parallel systems to account for existing tax transactions as well to meet the requirements of the GST regime.  Lack of clarity with respect to taxability of transactions with Jammu and Kashmir is also leaving many companies unnerved.  It would also be of utmost importance to carefully book all expenses and sales and map all the credits accurately in initial days of GST implementation for successful transition of all such credits to GST.

While it would also be fair to say that the staggered manner in which the Government has been releasing draft rules, rate schedules, notifications, amendments etc is making tax experts anxious, let alone the general public and the trade, the tremendous amount of work that the Government has put in for the July 1 roll-out of GST deserves appreciation. The Government has also tried to ease the pain of the industry with the introduction of relaxation for filing GST returns for the first 2 months of GST implementation.

The introduction of GST in India is an historic achievement and aspires toward greater cross-border collaboration and cooperation. As businesses make this transition, they should be mindful that new rules always create greater risk of non-compliance, and they should monitor the impact on pricing and margin. Given the challenges faced by businesses in adapting to this new landscape, we believe they would benefit from greater leniency in compliance requirements and related sanctions during the transitional period.

There are number of issues on which India Inc needs to focus. Here are top 3 -

IT systems to be geared up to issue tax invoices/ challans for supply/ dispatch

To be compliant and to avoid any hindrance to the business continuity, IT systems will need to be readied. Business should be ready to issue tax invoices/ challans from the first day of GST getting implemented. Invoice formats will have to be amended as soon as possible to align the same in confirmation with the GST laws. Moreover, according to GSTN requirements, customer related data as well as tax codes and conditions (used to compute tax on every transaction) will need to be updated in IT systems and configured to generate reports required for GST.  Further, there are prescribed details to be mentioned on various documents which are required to be issued as per the GST statute. IT systems should confirm whether such details are being captured on the relevant documentation. 

Finalisation of pricing   

Analyse the possible impact of subsuming of taxes and anti-profiteering measures on the business. Recompute the prices taking account of the reduction in cost of productions on account of decrease in tax rate or base price reduction.

Education of employees and other stakeholders 

It is imperative that all employees and supply chain partners, such as vendors, distributors and channel partners, are trained well on the new law. To ensure seamless passing of credit of taxes under GST and business to be compliant of the law, it is imperative that all stakeholders are appropriately educated on compliance-related requirements.  Employees involved in the execution of various business processes should also be made aware of the critical tax positions adopted by the company.

India is going to witness the biggest tax reform shortly. The important thing the industry needs to take care for a smooth roll-out would be preparedness of their ERP systems with clear understanding of the GST laws. Industry should have all the masters like material code with HSN numbers identified, Tax rates, Vendor list with their GSTIN. For issuing an invoice under GST one needs to be clear what is the tax rate that would be applicable to the supply. Government has issued the tariff notifications indicating the tax rates for various goods and also for services under CGST, SGST, IGST, UTGST and Compensation Cess. However the difficulty would be in case of certain goods which are falling in two different tax rates for which more clarity is required. Similarly most of the vendors could not get their GST migration completed due to GSTN portal issues. This directly results in a situation, wherein it would be difficult to deal with such vendors in GST in order to have smooth flow of input credit. Exports is one other area, which requires clarity as the industry is clueless how to do export under bond or LUT as there is no clarity on the jurisdictional officer for executing such bond or LUT. The allocation of assesses to CBEC and Commercial taxes was not announced as on date and the current jurisdictional authorities are not accepting any requests for issuance of re-warehousing certificates or endorsing the sales made against the duty credit scrips resulting in confusion to the trade. In some states, the commercial taxes department is not approving the statutory forms citing tax liabilities pending, but now it is time for being bit liberal in these aspects. The registered assesse cannot go anywhere and certainly this is not the time to discuss about the past dues. If the department can grant the statutory forms, then compliance will certainly improve manifold in GST. Even with SEZ authorities also, the Form I has been an issue due to lack of stationery.

GST has come and has come really fast unlike the “winter” that is still awaited. Keeping the myriad intricacies aside, businesses need to keep the focus on the top 3 areas in the coming of 2-3 months to sail through the GST ocean which are discussed hereunder -

1.   IT systems

GST will be IT driven and the most important thing for a business will be to check the actual modification done in their IT system. Generation of invoices, and allied documents need to be in line with the GST rules. Suitable modifications would have been done by now so that registers and reports are available as mandated under GST – however, the same needs to be validated with actual transactions under the GST era.

Although, the government has given a breathing space to undertake compliances by relaxation in the due date for the first two months, there will be no excuses for the business not to maintain the GST mandated information when the time for filing returns arrives. This would include that the IT systems incorporate the positions, certainty HSN codes, tax rates etc.

2.  ITC pertaining to the transitioning period

The transition provisions of CGST Act, 2017 provides for the carry forward and eligibility the availment of ITC in respect of the transactions overlapping under pre-GST and GST regime. Ambiguity persists in many areas and in order to avail ITC appropriately, businesses must ensure the following -

a.  Detailed working of the stock of goods as on 30 June 2017 along with the status of availability of excise invoices;

b Reconciled (books vis-à-vis returns) closing balances as per state VAT and central laws;

c.    Payment of tax on RCM related transactions for the month of June 2017 on 30 June 2017 so that credit could be availed under existing law;

3. Effect of Competition and anti-profiteering measures

While the GST council has introduced anti-profiteering provisions to control inflation, it is expected to have far reaching and deep effect on the way the business negotiations would happen.  The provision requires a dealer to pass on the benefit of increased input tax credits or reduction in rates to the buyer (non-compliance of the same would entail to not only penal consequences but also cancellation of the registration as per the Rules). In order to tap and control the negative effect arising due to such provisions, businesses should ensure the following:

a. A cost sheet relating to the purchases and sales should be in place on an AS-IS basis and under GST regime capturing the impact of taxes;

b. Be aware of industry trends in product pricing including competitor pricing and determine own pricing to comply with anti-profiteering law;

4.   Compliances

Compliances will be the key under GST. A robust team well versed with the GST law and compliance technicalities should be in place to ensure that compliances happen is a smooth manner. Services of Application Service Providers and GST Suvidha  Providers should be selected keeping in mind the level of technological assistance required for the business. If compliances are taken care of, then half the work is done.

The success of GST will be seen soon subject to the Indian industry handling certain crucial aspects as mentioned above in most appropriate manner.

We have been working on GST preparedness for several months. Our approach has been to identify the requirements in terms of technology and Business operations and accordingly decide on priority. We updated our Tax Module and SAP version well in advance to make sure that we are ready in terms technological infrastructure. As the law started emerging, we conducted business process impact assessment and took important decision on change in business processes. On finalisation of these process changes requirement to comply with GST law, our IT system has been configured to make sure that there is no issue in running business as usual in July, 2017. As there have been many changes in monthly compliance requirement, we shall be working on the same in July and we are sure that we shall be completely ready much ahead of compliance timelines as required by GST law.

Some of our concern includes export related process, tax rates have been given at 4 digit level as against 8 digit, no clarity on refund mechanism for production in excise exempted areas, complex job work provisions, transactions with customers / vendors in J&K,  no clarity w.r.t. assessing authority etc.

Most of the businesses are unprepared to implement the new indirect tax regime i.e. GST. Everything will now be online and will need to be updated regularly. A business will have to file so many returns in a year (three returns per month and one annual return) per state registration. If it does business from offices in more than one state, the number of returns will go up accordingly. A business with offices in three states will have to file 111 tax returns in a year.

A company like us who servicing throughout the country with operations in only one state will have to get registration in most of the states to get ITC benefit and file a so many returns instead of the current two only once the goods and services tax (GST) goes live from July 1, 2017, increasing work for organization and the entire ecosystem needs to be changed to accept GST. Finance professionals and industry seem unprepared for the challenges of implementing the one nation-one tax idea, work towards which began 13 years ago. Before all these, they have to get registered in all these states where they are providing services but currently GST portal become dead slow when lakhs of traders from across the country login at a time and the server frequently got hanged. I guess this is just a trailer before the implementation of GST in the country when lakhs of traders would login to the GST portal at a time for filing 37 types of returns. They also would have to upload supporting documents on to the portal. Imagine what would happen that time at such speed and the server get hanged frequently. GST would be entirely online, Central government should solve the issue of slow GST portal first.

Industry is facing implementation challenges that include system upgrades, manpower training and understanding new taxes. Every transaction – sale or purchase – will now have to be recorded online to benefit from the tax paid earlier. Majorly Indian businesses are not aware of the changes that GST will usher in. they are waiting for more clarity on tax rates, processes and the time frame for the systems to settle down from their respective GST Experts & software professionals.

Understanding GST Rule is not easy, whether to charge CGST/SGST or ISGT majorly depend on rules in respect to place of provision or supply because location of the supplier and the customer within the country is immaterial for the purpose GST Invoice. Every invoice from buyers and sellers must be entered in the GST system correctly to ensure that benefits accrue down the chain. We have a system today across a majority of small units where a part time accountant handle all these things on monthly basis, that will have to end now because we are moving to an online, almost real-time system that will need a lot of manpower. It would take at least 12 to 18 months for the system to settle down. India’s business will have to change systems, train personnel and accept the extra workload for the new taxation system.

Undoubtedly, it is the need of the times to streamline the multi-scattered indirect tax structure in India. While it is good that the taxation system will be streamlined and we will not have to deal with multiple tax payments like excise, service tax and value added tax but we still don’t know how much time it will take for everybody to be on board.

The long-awaited reform has witnessed all twists and turns before becoming a reality. GST is a collective outcome of perseverance of all the Governments (Union and State) and bureaucrats with an equal support of the industry. While the industry’s preparedness for the reform differs across companies, sectors and regions, the following three areas deserve merit:

Get your tax positions right: Till now, the industry has been focussing on setting the basics right like ability to raise and record invoices. Due to paucity of time, there is a likelihood that the tax regulations have not been fully understood or correctly implemented in the business. The industry should now focus on setting right its tax positions/

IT is the key: IT forms the backbone in the new tax regime both for government as well as taxpayers. GST is a perfect example of adopting the spirit of ‘Digital India’ campaign of the Union Government. The matching of input credits at an invoice level across the country is ambitious and is the real test of government’s IT framework as well as industry’s preparedness. Ramping-up the technology will be the key for any taxpayer for successful GST implementation.

Get ready for litigation: Undoubtedly, there are vagueness in many of the provisions of the GST law and rates of GST on goods and services. This would result in fresh set of disputes in next few years. The industry’s dream of litigation free tax regime seems to be far from reality.

1. Relook at the rate of some items like fertilizers to farmers  so the same is available to them at cheaper rate and they can make some savings from their meager income.

2. The initial period of hesitance / resistance for various apprehensions of the stakeholders be clarified and further grey areas if any after interaction with tax authorities.

3. The tax authorities should create helpdesks at local offices and be available for the trade and industry for clarifying doubts till the activities get normalised say over a period of one month or so. Tax authorities should not litigate or cause inconvenience to trade on unaddressed areas such as e-way bill/SEZ.

Jammu & Kashmir :  It seems that J&K may not implement GST wef July 1.  This has resulted in some concerns and issues for the industry for eg possible dual levy of IGST and J&K GST on goods sent to J&K for sale; whether excise duty would be leviable on goods manufactured in J&K; whether IGST or CVD / SAD would be applicable on imports from outside India into J&K.  Industry would wish that J&K implements GST at the earliest and in the meanwhile Government should clarify the issues and concerns of the industry.

Airline Industry : There could be a possible dual levy of GST on import of aircrafts on lease basis ie a 5% IGST on import of aircrafts and another 5% IGST on payment of lease rentals. The industry had represented to the Government and was expecting an exemption to avoid the dual levy; but the same has still not come out.  Also for economy class travel, there is a restriction of eligibility of GST credit on purchase of any goods; which the industry was hoping would be rectified but has not happened yet.

Auto Industry : There is lack of clarity on whether compensation cess would be applicable even on export of cars under the rebate scheme. With exports lined up for the auto industry; they would keenly await any clarification in this regard by the Government.

Real Estate Industry : There is some confusion in the industry that GST on under-construction projects has been fixed by the Government at 18% instead of the 12% proposed earlier by the GST Council.  This confusion is misplaced as there is an abatement of one-third for the value of land when you apply the rate of 18%; which makes the effective GST rate 12% only.

Oill & Gas : There were some rumours that the Government may include natural gas within the ambit of GST.  If this comes through, it would be a big positive for the industry and the industry would keenly await the same.  On a separate note, there is ambiguity on whether sectors covered under GST, say fertilisers industry, would be able to procure petroleum products like natural gas, diesel, etc at the current concessional rate of 2% by issue of Form C or not.  If this facility is not extended; the rate and cost of these products which are not creditable would go up significantly.

Car Leasing : For the existing care leases transitioning into GST; the tax cost would go up significantly by upto 30% in some cases. The industry is keenly awaiting relief on this count.

Cigarettes Industry : Since the GST Council has proposed 28% GST and a compensation cess equal to excise duty on cigarettes, the industry was expecting exemption from levy of excise duty; which has still not come out.  Industry would keenly await the same.

Long years ago we made a tryst with destiny, and now that time comes when we shall redeem our pledge, not wholly or in full measure, but very substantially. At the stroke of the midnight hour, …… A moment comes, which comes but rarely in history, when we step out from the old to new, when an age ends, .…. The appointed day has come - the day appointed by destiny - and India stands forth again, …..  A new star rises, .…, a new hope comes into being, a vision long cherished materializes. …

— Jawaharlal Nehru, On the Granting of Indian Independence, August 14, 1947

The above quote is quite relevant for this historic moment too - of introduction of new regime of GST.  The invisible journey of GST from 1986 (introduction of MODVAT Scheme) and visible journey of GST from 2002 (Task Force Report of Dr. Kelkar), comes to a beginning on the mid-night of July 1, 2017 - success is a journey, not a destination.  The new taxation reform, termed as the game changer or the single biggest tax reform, also paves way for new economic reforms and social reforms. 

Consumers, businesses, tax payer, tax administrator, policy makers and the Governments would remain closely associated with its migrations, implementation and the journey forward.

For the success of GST, the businesses (i) would need to ensure that they migrate smoothly to the new regime, (ii) should pass-on all the benefits to their customers that accrue to them and (iii) should try to comply timely and transparently at the earliest possible.

To migrate smoothly, one would need to read and understand the provisions of law and implement in spirit.  Spreading the correct awareness amongst business partners, suppliers, customers, business managers and employees is a prerequisite. A change is difficult in the first, can get messy in the middle and probably smoother at its end.  With spirit and awareness, intent to embrace the new would reduce the time from the first-step of migration to the end-step of migration.

The revised strategies of procurements, sales, marketing, supply chain, technology would entail benefits to the businesses.  The law mandates that the benefits arising from reduction of rates and of the input tax credit should be passed-on to the customers.  However, if the businesses also pass-on a portion of the benefits arising from the business re-engineering due to GST, the nation would reap the real benefits of the new regime.

Appropriate use of technology and required automations would smoothen the process for implementation and compliance – compliance timely and transparently. Government should continuously engage with businesses / trade / industry to understand their perspective of GST during implementation and businesses should also engage / respond appropriately to the Government to help them to formulate new policies and regulations.

GST also needs to be administered keeping in perspective the co-operative federalism, as depicted by the GST Council.