'GST to Combat Several Financial Structural Gaps'

"GST is going to substantially alter the way businesses are done and to a large extent should address the issues of tax cascading and accumulation of credits under an inverted duty structure," says Nimish Goel of International Business Advisers in an exclusive interview with Faiz Askari,

India is at a threshold of a great economic change. This is a critical time, specially with regards to country’s taxation structure. Yes, GST is all set to embark it’s journey and this single law is expected to make significant impact on the entire economic structure of the nation. In our bid to take a deep insight over this subject we approached experts to share their knowledge for our readers who are the representatives of country’s most important economic segment that is – Small & medium enterprises (SMEs) and the MSMEs which also includes the micro sized businesses.

Lets hear about GST from the expert himself, it is our pleasure to share this exclusive interview between, Faiz Askari, Founder Editor, SMEStreet and Nimish Goel – Partner and Head of Indirect Taxes at International Business Advisers.

Excerpts: 

FAIZ ASKARI: According to you, how will GST Law impact the Indian manufacturing industry?

Nimish Goel: The affect of GST needs to be gauged at each level, i.e., the procurement supply chain, manufacturing and the distribution supply chain.

The Indian manufacturing industry is currently plagued with multiple taxes at multiple levels.  On the procurement side, buying raw materials inter-state attracts Central Sales Tax (‘CST’),which is a cost to the manufacturer.  In addition, various industries such as pharma face the challenge of inverted duty structure, i.e., the inputs are taxed at higher rates vis-à-vis the finished product. This result in accumulation of taxes paid on inputs.

Manufacturing of goods attracts Excise duty.  The finished goods when sold from the factory attract VAT or CST and the value for computing VAT/CST is inclusive of excise duty.  This leads to a cascading effect, i.e. a tax on tax.

On the distribution side of the supply chain, movement of goods from one state to another attractsCST, Entry tax, Octroi, etc that all results in making the goods expensive.  All these taxes are levied taking other taxes in the base amount.  On an average a consumer good manufactured in India attracts approx. 28-30% taxes and duties.

On the compliance side, every manufacturer faces the issue of managing road permits and statutory forms such as Form C and F required for moving goods from one state to another.  Managing compliances around them and getting the tax assessments closed in various states is one of the biggest challenges faced by any manufacturing and trading company.

 GST is going to substantially alter the way businesses are done and to a large extent should address the issues of tax cascading and accumulation of credits under an inverted duty structure.  In addition, the hassles of managing statutory forms will go away and the movement of goods inter-state will be much faster and smoother.  In addition, IGST charged on inter-state procurement of goods shall be available as credit to the manufacturer.

FA: What should be the first step to get prepared for GST regime for any Small and mid- sized enterprise?

Nimish: The first step for any SME is to get an assessment done on how GST is going to impact their profitability and working capital requirements.  Increase or decrease in the rate of taxes for inputs and finished goods, availability of input credits across goods and services is going to impact the margins. Change from MRP based assessment to a transaction value method will also need an assessment of the impact on product pricing and working capital needs.

The other very important step will be to calibrate the ERP/IT system and make it GST attuned.  Under GST all compliances are necessarily going to be online and every assessee will be required to furnish invoice-wise details of their procurements and sales.  In addition, each output tax needs to be tallied with input tax and this will be done invoice wise. All this means uploading entire set of information on to the GST Network and doing it manually will be a difficult task.  Thus, the need for robust ERP software to manage the compliances.

Further, moving away from centralized service tax registration to a de-centralized state wise registration, transition of registrations of factory and depots to GST, generating state-wise tax details, filing returns etc. will all need substantial discussions and think through.

FA: What level of growth is expected in the GDP growth after GST?

Nimish: As per some published reports including the one issued by Kelkar Committee, India’s GDP is expected to grow by 2% upon introduction of GST.  Though the growth is expected to be more in the long term, in the short term we may experience slower growth due to increase in tax rates for services.  Since services constitute 60% of the GDP, likely increase in tax rates for services will have an immediate dent on the growth.  However, rates of tax are likely to go down for goods and that is likely to make things better for GDP.

However, in the long run one can surely expect to reap the benefits of efficiencies in the tax system and a large taxpayers base getting added in the tax regime. This is likely to create buoyancy in the economy, leading to a spur in the growth.

FA: Which are the sectors expected to get transformed with the advent of GST?

Nimish: GST will bring tremendous efficiencies in the supply chain since movement of goods across the nation shall be free from state border checks and regulatory hassles.  This will result in cost savings and better margins for companies having multi-state operations.

Logistics companies and retail companies should benefit from this seamless movement. In addition, with the availability of inter-state tax (IGST) as a credit, the companies operating on a pan-India basis with multiple warehouses are likely to move to a hub-and-spoke model of keeping larger and regional warehouses rather than having them in each state.  FMCG, mobile companies, 3PL logistics and warehouse companies would need to change their business and distribution models.

Companies in the services sector were unable to claim credit of taxes on capital goods and inputs, which under GST shall be allowed.  Pharma companies are also likely to benefit, as the accumulated credits lying unutilized because of an inverted duty structure shall be refunded under the GST.

E-commerce companies are likely to have a massive impact on account of the mammoth compliances they may have to undertake including taking registrations in each state and deducting tax at source on all supplies made by vendors through their portal.

On an overall basis, a large no. of sectors are likely to get affected by GST.

FA: What level of awareness and understanding is needed for the entrepreneur himself on this subject?

Nimish: GST is not only a tax reform but also a much larger business reform.  Every business vertical including supply chain, IT, accounting, marketing, sales and operations will get impacted by GST.  It is therefore, critical that every entrepreneur understands the nuances around GST and how he needs to be ready to embrace this change.

I would say the entrepreneur need not get into the specific details of the new tax provisions, but a larger sense of this reform should definitely be understood.  He/she should be able to visualize how the entire business mechanics need to change under GST including the gauging the effect on his competitors, margins and whether there will be a better way to do business.

There are experts in this field and taking appropriate guidance and advice should definitely be explored.

Since not much time is left for GST to get introduced, every entrepreneur should ascertain the level of readiness and preparedness for his/her organization.

FA: How is IBA helping organization who wish to explore GST’s impact on their respective businesses?

Nimish: IBA is working with a large no. of SMEs helping them understand the nuances of GST and how the CEOs and CFOs need to get ready for the transition.  We are working with organizations in the retail, manufacturing, e-commerce, logistics, pharma and services sectors.

IBA’s approach to assist its clients is broadly divided into three parts:

1. Impact assessment;
2. Implementation assessment; and
3. Training to various stakeholders

Our teams are currently working with CFOs and Head of Tax to ascertain the impact of GST on their operations.  We map the current business model and ascertain the tax impact at the transaction level bringing out detailed results on the impact on margins, profitability and ways to optimize the supply chain.

The implementation assistance involves advising on revising the legal contracts with vendors and clients to ensure sufficient cushion is provided for absorbing tax costs/impact.  Our teams are helping assist the client’s ERP vendor understand the tax points that need to be logically built in the IT system.  Further, advising on the most optimum tax efficient structure, integration of tax credits, preparing companies for a smooth transition etc.

It is also important all your vendors supplying goods and services are IT ready and understand the importance of GST.  Unless each vendor uploads his invoice in the GSTN and pays tax to the government, you will not be able to avail credit of tax. It is therefore, important to train all the stakeholders to ensure a smooth operation under GST.

FA: What are the key priorities for IBA in the direction of making the market aware with regards to GST implications?

Nimish: IBA is actively involved in publishing articles on a variety of topics including impact of GST on various industries.  The senior members are also active in imparting sessions on latest issues of interest to the stakeholders.

IBA has also tied up with few tax portals in dissemination of technical videos on various topics.  These videos shall be launched soon.

IBA is also open to train various industry associations should they need to train their members on GST.