GST Challenges Ahead – Important provisions in GST and its impact. At this moment, it is almost certain that the Goods and Service Tax (GST) will become a reality in India w.e.f. 1st July, 2017. This is going to be a major reform of Indian Tax Structure in Indirect Taxes. Its effect on economy, common public at large, businessmen, manufacturers, service providers and other stake holders will be far reaching. An attempt has been made here to evaluate some important provisions of the proposed GST, its impact on various sectors and challenges before all of us in this journey.

GST Challenges – Important provisions in GST and its impact :

1) Proposed structure –

In the proposed GST, there will be three different levies which will subsume present levies as under –

  • Central GST (CGST) – Central Excise duty and Service tax will be subsumed in this tax.
  • State GST (SGST) – State VAT, Octroi, Entertainment tax, Luxury tax, Tax on lotteries, betting and gambling will be subsumed in this tax.
  • Integrated GST (IGST) – This will be new version of tax replacing Central Excise Act, Service tax and Central Sales Tax in respect of Inter State supply of goods and services. The IGST is said to be the unique feature of GST to address the various issues of assessees.

2) Shift in Taxable event :

Presently, the taxable event is Manufacture or provision of service or sale of goods in respective legislations. In the proposed GST, the “chargeable event” will be Supply of goods and service. This major shift will have tremendous impact on business structures, business models and business decisions. The definition of Supply is very wide and it covers following

The definition of “Supply” as per Section 3 of Model GST Act is very comprehensive and it covers a wide range of transactions. The definition includes –

  • (a) all forms of supply of goods and /or services such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
  • (b) importation of services,

The schedules given in the Model Act clarify on following –

  • Schedule I – Matters made without consideration to be considered as supply.
  • Schedule II – Matters to be considered as supply or service.
  • Schedule III – Matters which are not to be considered as Supply or Service

Thus, the “Supply” concept is much simpler and easy to understand for common tax payers. The business activities are expected to be conducted smoothly.


3) IGST and Branch Transfers :

Presently the purchaser cannot claim set off of CST charged by the supplier. The 2% CST is cost to the buyer. In GST, credit is available of IGST. Thus, many business decisions will have impact of this provision as they will now explore the possibilities of procuring inter state with cheap rates.

Manufacturers have opened Depots, Branches across the country to sell the goods from respective states and to ensure that the CST does not become cost to the purchaser. But, now the manufacturers / Dealers will be required to do the Cost Benefit analysis of running such Depots visa-vis having a centralized location for storing the goods as purchaser will get the credit of tax so paid. So, closure of depots, branches, opening centralized warehouses are going to be the new business features

4) Cascading Effect nullified –

The present Cenvat Credit Scheme does not fully eliminate the cascading effect. In GST, the CGST, SGST or IGST will be levied on the basic value only. Hence the cascading effect will be fully nullified. Presently, for stock transfers / Branch transfers, the dealers have to forego some vat set off. This will also be eliminated in GST.

5) Anti-Profiteering Measures :

The effect of elimination of cascading effect is to reduce the ultimate price to the end customer. The Model GST Law has made a very important and dynamic provision vide Section 163 for AntiProfiteering Measures. The benefit of reduction in prices has to be finally transferred to end customers. In view of these anti profiteering provisions, every supplier is required to analyse the probable reduction in cost which can be passed on to the customers. Simultaneously, the supplier has to be vigilant enough to get similar reduction from his suppliers. The CMA professionals have an important and vital role to play in this context. They can do the impact analysis effectively and can advice the clients of extent of benefit available due to GST implementation.

7) Valuation matters simplified :

In the Model GST Act, only one method of valuation is prescribed – i.e. Transaction value. Thus, the present complications in valuation including related party transactions will not occur in GST. Thus the suppliers will have a clear understanding of the value for tax purpose without much complexity. This will definitely bring “ease in business”.

However, some new provisions are also incorporated which need to be kept in mind. These are –

a) Payment of GST in case of advance received for supply of material or service. b) Expenses like Weighment, loading in factory, inspection, testing before supply will be included in the value. (Section 15(2)(c)) c) Interest, Late Fee or Penalty for delayed payment of any consideration for any supply is includible in value (Section 15(2)(d)) d) Subsidies directly linked to the price excluding subsidies provided by the Central and State Government are includible in value (Section 15(2)(e))

The proposed provisions are very important and must be understood clearly by the assessees.

8) Matching Concept :

Entire success of implementation of GST exclusively depends on System Support. In GST, the Input Tax Credit will be available only after the matching is done by the GST Portal and credit will be allowed to the assessees only on the basis of the matched report. Further, the credit will be allowed only if the assessee files a “Valid Return” which means he pays the taxes in full and files the return.

This modus operandi of allowing credit will have diversified effects on the business aspects –

  • Selection of vendors who are compliant under GST.
  • Reduction in the number of vendors to the extent possible.
  • Change in the methods of accounting of bills in books of accounts
  • Importance of reconciliation of input tax credit.
  • Increased requirement of Working capital for GST compliance.
  • Ensuring sufficient support from ERP system.
  • Qualified and knowledgeable workforce.
  • Alternatively, obtain assistance from third party agencies / consultants.
  • Uploading of various returns as prescribed within the given time frame without any exception.
  • Availing of Input Tax Credit within the prescribed time limit.
  • The process demands proper and timely issue of Debit Notes and Credit Notes wherever required

In short, the above requirements will teach the tax payers “How to do a Business”.

9) Impact on various industries

The GST will have tremendous impact on various industries. The effect on some important sectors will be as below –

Manufacturing Sector

  • Reduction in time spent on logistics, check posts resulting in improvement in Just in Time inventories.
  • No concept of Manufacture and also simplified valuation methods will make the business operations easy.
  • Assessment by only one Tax authority will be beneficial to all tax payers
  • Matching of credit will be a real challenge.

ii) Trading Sector –

  • Simplified invoice format. No disclosure of purchase details as per present Dealer Invoice.
  • Credit of all taxes paid available.

iii) Service Sector – 

  • Services to end customer will become costlier.
  • Refund mechanism through e-mode will be hassle free. i

v) Textile Sector 

  • Cascading of tax due to blocked input credit will be reduced.
  • No breaking up of smaller units – Dummy units will be abolished.
  • More competition for export consignments.

v) Automobile Sector

  • Better pricing and margins.
  • Supply Chain Management – Direct sale to Dealers or Transfer to Depots across the country will smoothen. Advantages of closing some Depots
  • Disputes on admissibility of credit, valuation, classification will reduce

vi) Agricultural Sector –

  • Almost all food items and agricultural produce will be under GST. Exemption all unprocessed farm products sold at farm gate.
  • No exemption for cash crops.
  • Merit rate for food processed goods resulting in increase in prices.

vii) E-Commerce –

  • No trade barrier for inter state movement of goods offered by e-commerce.
  • No classification issues of goods offered viz. e-books, softwares, music etc.
  • Importance of Place of Supply Rules to this sector will be vital.
  • More clarity required on issues like advances, drop shipment, gift vouchers, cash on delivery etc

10) Challenges before Tax Administrators –

In the GST regime, no dual administration is proposed. In GST, the tax base will be widened to a large extent. It will be a challenging task before the tax authorities to bring all these tax payers on record..

11) System Support

The matching concept as explained above demands –

  • Availability of Internet facility in remote areas.
  • Capability of the Portal to take load across the country.

The Government agencies are taking all out efforts to introduce this concept. However, considering its modus operandi, vast assessee base across the nation and poor literacy about computerization with common tax payers, success of this system creates doubts. Hence, if the models are made available for trial runs to the tax payers, the friendliness towards the system can be enhanced well before the actual date of implementation. The Government will also understand the shortcomings in the present system and time for modification of the system will be available.

Conclusions :

Thus, for successful and smooth implementation, the following challenges should also be addressed simultaneously :

  • a) Problem resolving Mechanism to be kept in place once the Act comes into force. Lenient view to be taken for some non compliances which occur without intention to evade payment of tax.
  • b) More confidence should be entrusted on the tax payers. The old attitude of looking at the tax payers as “Evaders” should be given up and a healthy atmosphere should be created and developed.
  • c) Tax Rates for goods should be announced immediately. Assessees will be ready with changes in their system.
  • d) Training to staff, assessees about the provisions of GST in every corner of the country is essential

If these aspects are not thought over, the new levy would just become : Old Wine in New Bottle. Everyone should take steps in positive direction so that this situation does not arise and the GST will give the desired results in the years to come

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