By -Manish Asawa
The Goods and Services Tax (GST) has been the buzzword for quite a while. It is finally set to be introduced on the stroke of midnight of 30th June 2017. Like any other reform, it is set to change the way taxes are levied on goods and services in India. It is essential to understand what GST is and how it will impact each one of us.
Goods and Services Tax is a major change in overhauling Indian indirect tax system. Currently, there are multiple taxes on Goods manufactured and services provided and there are incidences of cascading or double taxation. In current environment, tax is applied on basis of place of origination of Goods and Services. GST will change that and now will be destination based tax. Thus, GST is introduced to provide level playing field for all. It will not matter if an organization has office in multiple locations/ states. Everyone can claim similar tax credit under GST.
Under GST, all current taxes will be subsumed and only 3 types of taxes will be applicable-
• Central GST (CGST) – to be levied by the Center
• State GST (SGST) or Union Territory GST (UGST) to be levied by the States including Union territories
• An Integrated GST (IGST) would be levied on inter-State supply (including stock transfers) of goods or services. This would be collected by the Centre.
• Imports will be treated as Inter State supplies and will attract IGST. Exports will be charged at 0% GST and all the input taxes can be claimed as refund.
The CGST and SGST will have same rate and CST will contribute to Central Government Revenue and SGST will contribute to State. Any goods or services provided within the state will attract SGST and SGST consists of equal % share of CGST and SGST. For instance:
• On selling a manufactured goods to a party within same state, let’s say it attracts 18% GST rate. Then 9 % will go to Central Government and 9 % to State. IGST will apply on interstate supply of Goods or services. IGST is revenue to Central Government.
• Under GST if goods or services are provided free of any consideration, it will still be taxed. If an organization transfers its goods to its warehouse in another state for further sale, it will be taxed at the time of transfer and again when final sale is made, though the tax paid earlier can be claimed as Input Tax Credit.
It is mandatory to register the organization or business under GST and obtain GST registration number for each state in which the operations are. If not registered under GST, then one cannot claim input tax credit. For any person, company or individual if they provide service which will attract service tax then GST registration is mandatory.
Threshold limit for paying GST is annual turnover of 20 Lakhs except for certain states having 10 lakhs. There would be mainly four tax rates namely 5%, 12%, 18% and 28%. Besides some goods and services would be under list of exempt items.
In India, taxes are levied when a product or service is bought as well as when it is sold. These taxes are invariably borne by the customer or buyer. The longer the supply chain, the more its effect. The end-customer, most often the common man, hence must bear the brunt of all these taxes. GST aims to reduce the burden of cascading effect of these taxes. GST is applied across the supply chain at every point where there is a value addition and a corresponding rise in price. For example: If you buy wheat and convert it to flour, the value-added product incurs a tax. A tax is further levied when this is converted to biscuits.
As per the current structure, there is a central duty on manufacturing and a Value Added Tax (VAT) levied by the state. With GST, the taxes will be levied at each point and accordingly, the central and the state taxes will come into being. For example, let’s assume a packet of coffee is manufactured and stored in a warehouse in Kerala. It is packaged and transported to Rajasthan for consumption. In such a scenario, the state of Kerala will benefit from taxes on manufacturing and storage and the state of Rajasthan will enjoy the taxes levied on the final sale of the product.
How will it help the common man?
If a manufacturer pays Rs. 100 for the raw material and pays a 10% tax on it, the total cost for him comes to Rs. 110. If he adds Rs. 100 as a value-add and creates a finished product that he would sell to a wholesaler, he would sell it at Rs. 220 (Rs. 100 cost price + Rs. 100 value-add) +10% tax). This cascading effect of taxes means that the common man (who is normally at the end of the supply chain) must shell out way more than the actual cost of the product.
However, with GST being introduced, the manufacturer in the above case can claim an exemption of Rs. 10 that he paid as tax for the procurement of the raw material. Hence, he would be able to pass on that benefit to the wholesaler who will now have to pay Rs. 210 instead of Rs. 220. This Rs. 10 is called as input tax credit. The effect of input tax credit across the supply chain will mean that the common man might be able to get the product at a cheaper rate than he does today.
GST is thus, a destination based tax as against being origin based. As far as imports are concerned, they will be treated as IGST and collected by central government. Exports would be zero-rated.
So, how do you tame the GST beast?
To ensure your organization can be GST ready and record taxes to get full input tax credit, the business should ensure the following:
• Get GST registration done for all states where you are operational and get GST registration against multiple PAN numbers if applicable. For all the suppliers and customers, one should get their GST registration details and update the records in the system. This would be required to file tax returns for purchases and sales made would enable you to take input tax credit.
• One’s own GST registration numbers and communication should go to all vendors and request must be made to them to upload all their invoices to Government’s GST Network site. This will help your organization avail all input tax credit in time. Also, a proper channel should be established with vendors and customers so if any reconciliation differences are there in ITC, the same can be sorted at the earliest.
• Have proper addresses for suppliers and customers updated in application system as the state location of vendor or customer will be important to decide what kind of GST should be applied like IGST or SGST.
• Need to carry out a detailed study internally or with help of GST consultants, to analyze what type of GST tax is applicable for different business transactions. This will help to accurately file for refund claim on Input Tax. Certain small businesses can choose to be under composite scheme where they can pay tax at a predefined rate but cannot claim any Input Tax Credit.
• As the GST rolls out happens, there is a looming question on Manufacturers as to what happens to the unsold stock and indirect taxes like Excise paid on them.
• Care should be taken to ensure a proper stock taking is done. Under GST, if there is a proof of Excise payment, then 100% can be claimed as Input tax credit on sales under GST regime. For manufacturers, who have not paid excise can claim up to 60% duty as Input tax credit.
• Need to ensure that provision is made to upload all the relevant purchase and sales data in required format to Government GST Network site. Government has authorized few GSP, GST Suvidha Providers who assist in connecting to GSTN and upload the data and also provide reconciliation information.
Other steps to be taken include:
• Enable the transaction recording application system for GST:
• Like for an ERP system, apply patches as provided by vendor
• For other small business accounting applications, make provision to record Taxes appropriately like maintaining details in Excel etc.
• Test the whole process in test environment before moving to production
• Make provision for generating legal reports like TDS returns.
One Nation. One Tax.
Taming the GST beast is all about understanding the cascading effect of taxes, tax slabs applicable to your products and services as well as the raw materials that you procure. Once you do so, apply the checklist mentioned above and leverage the benefits of a “One Nation. One Tax” regime. I am sure GST will be a game-changer as far as indirect taxation in India is concerned. It will give businesses a positive fillip and make the business environment very friendly and conducive.
[The author is AVP, Enterprise Applications, Clover Infotech]