The indirect tax regime comes with multiple tax collectors (centre, state, local body, etc) of taxes (excise, sales tax, octroi, etc), as well as multiplicity of tax rates. Besides, there is tax on tax which has a cascading effect with limited input credit, leading to a bloated end-consumer price. With businessmen, advisors and the likes finding ways to evade/avoid taxes to optimise final purchase cost, this has resulted in tax litigations, limited tax compliances and encouragement to the corrupt.
The passage of the GST Amendment Bill is a landmark step to limit power of several tax authorities and vest it in hands of the GST tax council. This is expected to bring unification, harmonisation and simplification of the indirect tax regime in India. The new GST law is likely to be implemented some time in 2017.
So how will GST impact all of us? Goods and service tax, popularly known as GST, is expected to bring all indirect taxes (like excise, VAT, octroi, etc) under one tax. This will be a landmark achievement for India. It will have a profound impact on how we in the building materials segment go about doing our business. Key highlights of these changes are as under:
Most countries in the world follow one indirect tax known as VAT. Indian GST will be similar to VAT. The good news is that you have to deal with only one tax authority. While there will be one law, sharing of tax revenue will be designed such that centre and state will jointly share revenue from this collection. We are already hearing nomenclatures like CGST for Central part of GST, SGST for state part of GST, and IGST for cases needing collection under integrated GST for subsequent sharing.
There will be improved transparency of trade transaction. Forms and permit will be reduced. We may not see long queues of trucks at state boarders. With GST we expect less of red tape, and reduced travel time of goods due to unification and digitisation.
There will be periodical return filing and annual audit, just like it is today under VAT. Tax credit is a very important point; in the GST regime the supplier should be a registered dealer, should pay tax, and his credit should be visible on your account online.
On trading stock you do not have input tax credit today. While you will charge high GST, say 15-28% on sale, you will get credit also for all past purchases; tax paid on your opening stock that corresponds to last 12 months purchase will be eligible for credit.
Barring few exceptions, tax paid on all purchases will be available for immediate credit. Since everyone ends up paying net between tax collected and tax paid, there is no reason to avoid tax. So the tax net will be broad-based.
Part of import duty paid in lieu of local tax will be available as input credit even to trading purchases.
Cash Flow Impact
Timing of payment, collection and input credit will have significant impact on your cash flow. Tax amounts will be significantly large, at times more than 20% of the transaction value. This means 1/5th of the amount will be bringing huge cash flow impact, depending on your timing of collection and input credit. Please be aware of this significant liquidity impact on your cash flow.
All of us have to ramp up our IT system of sales accounting to prepare future invoices and records as per new requirements. The government is preparing huge IT infrastructure to cope with the tax collection. All of us will have to gear up to match this requirement on the information technology front.
At present excise and VAT are origin based taxes; GST will be a destination based tax. State wise warehouses will not be required any more for national companies. Rather, such warehouses will be created based on pure logistic and delivery requirements of each region. This means many small warehouses will be closed and fewer but bigger warehouses will be soon visible. Delivery trucks will also be bigger in size to optimise transport costs and transfer to few large warehouses.
Impact on Building Materials
There is a general belief among the trade that tax evasion is widely prevalent. Now with easy pass-on of tax credit at each stage, the incentive not to pay tax will go away. This means all small players will come under the tax net, leading to reduction in price gap between branded and unbranded goods. This means honest tax payers will have a more level playing field. Indian companies will get relief from inverted duty structures, leading to increased competitiveness vis-à-vis global players.
The cascading effect (tax on tax) will go away and to that extent prices will be rationalised. For example, if a product costs Rs 100 + Rs 15 = Rs 115, with Rs 15 being excise. Now when you raise an invoice, you pay VAT on Rs 115, not on Rs 100. This means to the extent you pay VAT on Rs 15, you are paying tax on tax. The net impact may lead to reduction in prices for end-consumers, since the overall tax component may go down.