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GST is still some time
away — the Centre and the states are yet to decide on the rates, a draft law is
not ready, the constitutional amendment is yet to happen — but companies are
already trying to figure out its impact, and getting ready for it.
Companies have formed internal teams to understand how GST will affect their
bottom line, working capital, supply chain, manufacturing, long-term contracts,
and new investments. A few companies have also engaged tax consultants to help
them make a transition to the new system.
“Everything they have been doing in the pre-GST environment could change,” said
Rajeev Dimri, head of indirect taxes with BMR Advisors. Companies would have to
figure out where to manufacture, where to procure from, and how to distribute
and price their goods.
“GST is increasingly being seen as a business issue and not just a tax issue. In
many board meetings, the preparedness for GST is being discussed and reviewed,”
said Pratik Jain, executive director, KPMG India.
Indian companies have been living with multiplicity of taxes, though the
effective tax rate has come down from 40 per cent to 20 per cent. Taxes often
dictate a company’s decision where to manufacture and how to distribute its
goods.
Companies set up manufacturing units in states which offer tax benefits. To have
a more tax-efficient distribution, they set up warehouses across states. They
don’t have to pay central sales tax (CST) if they do a stock transfer to
warehouses.
Many taxes, including CST, will be subsumed into GST. GST will also replace a
bevy of other levies like excise, sales tax, value-added tax, entertainment tax
and luxury tax.
Consequently, the need for having multiple warehouses will get diminished,
though companies may choose to retain them for strategic reasons (say, for being
close to their customers).
Satya Poddar, partner, Ernst & Young, said the procurement pattern would change.
‘‘Right now, people try to ensure that goods come with as little tax as
possible. Once GST comes, the timing and place of procurement will change,’’ he
said.
In the recent past, companies have set up manufacturing units in excise-free
zones like Baddi in Himachal Pradesh. New units won’t get excise exemption, and
it is not clear how the existing units will be treated for GST. Companies as
well as states like Himachal and Uttarakhand are lobbying hard with the
government to ensure their benefits are not diluted. “Companies will have to
figure out how they can minimise the consequence of these investments,” said
Poddar.
Currently, companies try to source their inputs from within a state as they get
a set-off on the value added tax (VAT) charged by vendors. When they source from
outside, the vendors charge CST, which cannot be set off. Under GST, companies
will able to set off taxes paid on inputs, irrespective of where they are
sourced from.
Consumer goods companies often run promotions where when you buy one, you get
one free. In the current regime, if you give something free you can’t claim
credits on the tax paid on the inputs. “Today, we have a fractured credit
mechanism, which is spread over too many activities and too many states. I don’t
get a credit for every tax I pay,” said Dimri.
Under GST, there will be no distinction among manufacturers, traders and service
providers. At present, traders don’t get credit for anything other than state
VAT. The world over, retailers get credit on the taxes they pay on creating
infrastructure. In India, they don’t.
The change will be more complex for conglomerates. Take Larsen & Tourbo, which
is into construction, manufacturing, and software. It will take two-three months
just to understand the impact of GST on the company. Companies fear they may not
get sufficient time if the government unveils the draft by December 31 this year
and implements the new system on April 1, 2011.
The impact on working capital could be significant as all transactions,
including stock transfers, will be subjected to GST. A company pays excise when
it manufactures and ships its goods, and VAT when it sells them. When GST comes,
it will have to be paid as soon as there is a stock transfer. But the company
will be able to claim credit on the tax paid only when it finally sells the
goods, which could take months. The company’s money will be blocked in this
period.
“Many companies are grappling with the impact on working capital,” said KPMG’s
Jain. Consider how it would impact a chemical major, which imports 80 per cent
of its raw material. Currently, it pays Customs duty of 14 per cent
(countervailing duty and special additional duty). But if import GST is 18 per
cent, its working capital requirement could go up significantly.
Companies are working with their information technology vendors on the changes
needed to capture a lot of data that would be required to claim credits.
“Everything you purchase will be available as credit; accounting systems will
have to be reconfigured to capture the data,” said Bobby Parekh, partner, BMR
Advisors.
Jain said this was the biggest worry for many multinational companies, who fear
that they will not get enough time for upgrade.
Luxury tax, which hotels charge on the tariff, is another ticklish area.
Currently, companies are not allowed to set it off against the other taxes they
pay. As hotels will also adopt GST, companies will have to capture the data in
their systems.
Many companies have long-term contracts in sectors like telecom and
infrastructure. Road construction contracts, which are exempt from service tax,
could be subjected to GST. Similarly, the taxes you pay on procurement from
third-party service providers could be available as set-off. So, companies are
looking at long-term contracts, examining the change-in clause, and how it will
work. Similarly, for new contracts, they are factoring in GST.
Some companies are worried that the tax design may not be efficient. “There is a
view that essential commodities should attract lower tax, but it is not clear
how would they define essential commodities like tea, coffee, sugar, salt and
edible oil, and where exactly the line would be drawn,” said Poddar.
Source:
Business Standard, India, dated
15/04/2010
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