With the April 1, 2017 GST deadline fast approaching it is a race against time for the lawmakers, tax department and taxpayers alike. New developments are happening each day. The Goods and Services Tax Council has made the much anticipated move and decided on the final tax rates. While much is still up in the air, the consumers and businesses have their own share of concerns about the possible impact of this mega change. In this post, we are breaking down the two areas of interest based upon information available so far.
By now it is abundantly clear that there is going be a readjustment in prices of goods and an increase in the cost of services. The new system is going to have 4 rates – two standard rates of 12% and 18%, a lower rate of 5% and a peak rate of 28%. This arrangement has reportedly found favor with the states and the NITI Ayog. As for the standard rates, Economic Affairs Secretary Shaktikanta Das said, “You cannot have a rate structure where governments run into huge deficit. Therefore, GST rates are worked out in such a manner that the bulk of commodities are under the standard rate, which is 18 per cent.”
There has been a lot of speculation around essential FMCG goods, which would have fallen in the 28% bracket. As it stands now, some of the items that are consumed on a mass scale are likely to get a differential treatment. Finance Minister Arun Jaitley clarified, “……the consensus is that these items with cascading effect of 30-31% will now be taxed at 28%, but with a rider. And the rider is that in this category there are several items which are now being used increasingly by a very large number of people, particularly the lower middle class. So for them, 28% or 30% or 31% will be higher and so we are transferring them to 18%.”
About 50% of the items forming part of the CPI basket will be zero-rated under GST. On the other hand, kitchen staples, such as condiments, will move from 3% currently to 5% in the new regime. Most items of mass consumption will attract the 5% rate. Small cars and certain consumer durables (currently 30-31% tax rate) will fall in the 28% bracket. The highest rate of 28% plus cess will apply on luxury items (such as big cars) and sin goods (tobacco, alcohol, soft drinks, etc.). However, complete clarity will be available only after the Council releases the goods classification list.
The tax rate on services is likely to jump from 15% currently to 18%. Certain services that enjoy greater abatement are expected to fall in 12% or 5% brackets. The GST turnover threshold is set at INR 20 lac (INR 10 lac for NE states) and therefore small vendors will be out of the tax net. This is a twofold increase from the existing limits under Service Tax and a significant change from the state VATs. This translates into availability of goods and services from more sellers without GST implication. On the other hand, expect an increase in phone, internet and all other service bills. With electricity and petroleum out of the scope of GST for at least a few years, the benefits of a uniform regime will not be available for these two critical items of consumption.
The GST impact on businesses will be in several areas, including tax management, working capital management and procurement. The compliance burden and associated costs are also expected to increase with multiple registrations and returns. Entities with turnover below INR 1.5 cr will be assessed by the states. Those above that threshold will be assigned using the cross empowerment model. Though, there is a consensus that an assessee will be assessed by only one authority, the exact formula is still in works. GST in India has come out with a complicated structure with 3 types of taxes and 4 rates. Product classification matters and the inherent complexities in the system may give rise to increased litigation at least in the near term.
Another area to be impacted is procurement and logistics. Of the three taxes – CGST, SGST and IGST – there are restrictions on the setoff of CGST and IGST credit. In addition, stock transfers and free samples will now come within the tax net. Businesses will need to realign their sourcing channels, warehousing and registrations. Among others, these provisions are likely to impact the FMCG sector squarely.
The utilization of Input Tax Credit (ITC) under GST comes with some riders. For example, a downstream assessee cannot claim input tax unless the supplier has paid the tax. The clauses related to “provisional credit” and “final credit” indicate that the utilization of ITC under GST will be more time consuming than the current regime. This implies higher working capital requirements, particularly for smaller business that operate on thin margins. Similarly, tax collection at source requirements for online retailers will also increase the working capital needs.
This article by Manish Chowdhary, Tally Solutions, talks about the potential fall outs of the stringent rules for ITC and where the provisions deserve a second look to mitigate the risks. Find additional examples in this post.
GST will address myriad challenges facing the current indirect tax regime, including tax evasion and administrative inefficiencies. Though, it goes without saying that the stakeholders will need to go over a bumpy road in the initial phase. In the long term, however, the benefits of a unified system will begin to trickle down. There is nothing to fear the GST change. Advance preparation will be the biggest enabler for timely management decisions and a smoother transition. Work with experts to understand the implications for you and make GST a profitable opportunity for your business. Please visit our website for details about our full line of services or write to us.