How the taxpayer will be affected by GST      

The release of the first discussion paper on the goods and services tax (GST) has set the ball rolling for taxpayers to initiate action plans towards managing this change. It would not be unreasonable to state that the delta created by switching over to GST would be significant and needs detailed analysis and a robust plan of action to capitalize on opportunities, mitigate risks and deal with the change.

While the paper does not cover all aspects of the proposed regulations, it provides sufficient guidelines on how the regulations will unfold. Some of the significant aspects are the dual model, treatment of interstate transactions, the framework of rates, and expected uniformity in classification and valuation.

It is reasonably clear as to which indirect taxes will be merged into GST as of now. An immediate impact area for businesses paying these taxes is to understand how the tax would change—if at all—under GST. For example, the basis of levy of excise and service tax is likely to change. Similarly, some tax laws are now joining the value-added tax system, which were till now neither fully creditable nor any full credits were allowed to be offset for payment of such taxes—namely, excise duty under the Medicinal and Toilet Preparations (Excise Duties) Act, entertainment tax and luxury tax. These changes can have a considerable impact on trade and industry ranging from how tax is levied to when it is required to be paid to whether credits accrue for such taxes, not to mention compliance changes.

In terms of point of levy, it has been stated that “transactions for a consideration” would be liable to tax. This may therefore suggest that taxes will apply only when goods are sold or services are supplied. However, it is currently being debated on how stock transfers, inter-unit transfers and inter-office services on an interstate basis should be treated.

One view is that with the withdrawal of the requirement to issue forms evidencing veracity of a stock transfer of goods. GST may be made applicable to such transfers also. This changes the entire framework of how taxes are being computed and tracked by trade and industry. There would be a manifold increase in the number of transactions liable to tax, requiring a robust information technology system and trained personnel to compute all taxable transactions, capture all resultant credits in the recipient locations and report all such information in both the returns—one for the sending location and other for the receiving location.

An integrated GST (IGST) model has been proposed for taxing of interstate supply of goods and services. This is an interesting mechanism to ensure that interstate transactions come into the fold of GST. It is not clear as of now whether the model would trigger additional compliance requirements on the taxpayer, but it is certainly clear that there credit pool for IGST would have to be separately maintained.

With dual GST already requiring separate credit pools for Central GST and state GST and the paper suggesting that the current input credit mechanism would be replaced by a new system, trade would have to be ready to accept credit data into its systems, track it separately and generate accurate output to understand what credits are available for each of the three pools, and how they should be utilized as per the new mechanism, which is yet to be rolled out.

For service providers, the IGST model may have far-reaching implications. Currently, most service providers operate under a centralized registration model and are paying taxes for services provided pan-India at one location. With states getting power to tax services rendered in their states, there may be a dilution in this concept of one registration, one tax office concept, and compliance would get triggered in all states where services are provided. It is also expected that a set of rules defining place of supply of services would be rolled out.

In summary, the discussion paper is a significant step towards rationalizing the indirect tax framework of India. While there is no specific commitment on this date of implementation in the paper, it is encouraging that some of the key issues have been ironed out. It is now time for businesses to gear up for this change.