How to realise GST’s full potential

The goods and services tax is an enormous opportunity to transform business. The GST law and the GST rates together make sure that firms would pay fewer taxes, face less tax on tax incidences, pay same taxes across the country and almost forget about State boundaries.

But to benefit fully, firms will have to grasp the import of the new business issues introduced under the GST.

There are eight issues that are crucial for business.

1. Working capital blockage due to the taxability of stock transfers between branches : GST makes any stock transfers to the branches of the same firm located in different States taxable. This would result in working capital blockage. Why? While GST will have to be paid in the month of stock transfer, input tax credit can only be claimed when the stock is sold by the receiving branch. This will affect most firms. Those in FMCG and pharmaceuticals will take a bigger beating. Firms dealing with seasonal products will also be hit hard because even though production takes place throughout the year, sales are limited to just a few months.

2. The recipient of the goods and not the supplier would be responsible for payment of tax and filing of returns : The recipient would be allowed to claim input tax credit only when the previous supplier actually files returns and pays the full tax on supplies. If the supplier/recipient does not pay tax, the tax payable on account of such mismatch will be added to the output tax liability of the recipient. For a sector like retail where a large number of small firms supply goods, it would be difficult to ensure that everyone has paid tax on the invoices raised.

3. Buying of goods from firms not registered with GST would be expensive : A GST-registered firm buying goods from unregistered firms will not get input tax credit. If a firm registered under the composition schemes buys goods from unregistered firms, he (buyer) will be required to pay tax under reverse charge. Such provisions will put firms otherwise legally exempted from registration (on account of low turnover) at a disadvantageous position making their supplies expensive. As the firms would prefer to source goods from GST-registered vendors, many unorganised sector firms may register under GST even though they would be exempt on the turnover criteria.

4. No refund of taxes on the use of taxable supplies as inputs for producing GST exempt produce : GST paid on the inputs would add to the price of the GST exempt products as the input tax paid would not be refunded. Major products affected would be agriculture products. For example, taxes paid on pesticides, insecticides, capital goods for the growing of wheat would not be refunded. Thus, the post-GST situation would be the same as in the current system. Refunds would, however, be available on the use of exempted supplies as inputs.

5. A large number of returns : GST mandates electronic filing of returns. A regular dealer operating in one State will have to file three monthly returns and one annual return. A firm needs to take registration for each business vertical in a State. Let us say a firm operates in 10 States and in each State it took four registrations, one for each of the business verticals. The total number of returns it would be required to file annually would be 1,480. A firm will need to upgrade IT and accounting systems to meet the needs of GST-compliance requirements and hire appropriately trained manpower. Since GSTN will have precise details of each transaction, its software can be tweaked to work effectively with just a single registration without sacrificing any functionality of the multiple registration or interests of the State governments. This would greatly reduce the compliance burden. Who knows, this may be the next reform.

6. Cumbersome procedure for payments received in advance : Consider the coming launch of iPhone-8 after six months. Apple has allowed consumers to book the phone by paying advance money now. In the present system, the dealer pays tax at the time of actual supply of the phone. But under GST, the dealer would be required to pay tax as soon as he receives an advance and not at the time of actual supply of goods which will happen subsequently. Input tax xredit would be available only when the actual sale takes place. Dealers now will have to declare the details of each advance in the electronic GSTR-1 form (monthly return form for suppliers). If a dealer has booked 2,000 phones, details of each will have to be entered in GSTR-1 and tax paid on the money received. All details have to be reconciled when the actual sale takes place and the invoice is raised. Such a procedure will increase compliance cost.

7. Existing tax incentive schemes would lose special treatment : States such as Himachal Pradesh and Uttarakhand offering area-based exemptions would be affected as such exemptions will no longer be available. For continuance of exemptions, they would require reimbursement through the budgetary route.

This provision along with the concept of tax collected on destination principle will influence the location of industries. Producer States will have a lower financial incentive to offer such concessions, as GST will only be credited to the State where the supplies are consumed.

So States with many metros and large cities will collect more tax and will be in a position to invest more in infrastructure and thereby attract businesses to locate production centres in their States. Underdeveloped States with large consuming populations will also collect more tax.

8. Treatment of existing tax credits such as CENVAT, VAT : The carry forward would be allowed as input tax credit only when the date of invoices or any other prescribed duty/tax-paying documents is within 12 months from the date of transitioning to GST.

There are also other conditions such as the closing stock must be used for taxable supplies and benefit of such credit is passed on, by way of reduced prices, to the recipient. A careful factoring of these issues in the business strategy would allow firms to realise the full potential unleashed by GST.

The writer is from the Indian Trade Service. The views are personal. Adapted from his forthcoming book, ‘The GST Nation — A Guide for Business Transformation’

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