CMA Bhogavalli Mallikarjuna Gupta

Bogavalli Mallikarjuna Gupta

Goods and Service Tax (GST) is a comprehensive tax on levied on supply of goods or services or both It is also known as Value Added Tax (VAT) in few countries and it is implemented in about 165 countries across the globe. Rolling out of GST in India is being dubbed to mother of the indirect tax reforms. Basic features of GST

  • Goods and services treated in same manner
  • No tax cascading – tax on tax
  • Uninterrupted input tax credit in the whole supply chain cycle
  • Same taxation at pan India level
  • Harmonization of state and central taxes
  • Minimal number of taxes

Whatever may be the time frame for the rollout and implementation of GST in India, it has huge impact on the business process and to the business houses. The business process have to be changed due to the above mentioned points. The budget session of the Parliament is being proposed from 23rd February, 2016 and it is expected to be placed in the Rajya Sabha for discussion. The government is in favor of accepting two of the three demands raised by the opposition party congress to drop additional tax of upto one percent on the interstate sales, structure of the GST Council and not willing to accept the demand of introducing the cap on the GST rates in the constitutional amendment bill. Keeping this apart, the business houses have change their process in the way they work today rite from the decision of setting up of new plant or on purchase and sales contracts etc.

At whatever date the GST will be rolled out, there will be some initial hiccups and the business must be well prepared to face them and for this meticulous planning is required with a strategy for running the business with minimal impact and ensuring that the bottom-line and the topline are not impacted. Listed here are some of the areas under which the business have to make changes to have smooth business operations under GST when it is rolled out. Organizations have to work in the following areas predominantly for smooth rollout of GST and also to have continuous business operations without any interruptions

  1. Training of the teams
  2. Registration Number
  3. Contract renegotiations
  4. Change of business process
  5. Impact on costing of goods and services
  6. Working capital management
  7. IT Systems
  8. Future expansions

1. Training of the Teams

Organization are spending a lot of amounts on the training of their teams to meet the ever changing business models, new technology to meet the competitive edge in doing the business. The finance, purchase and sales team along with other teams, wherever necessary, should be provided with an overview of the GST as a first step. The second step starts when the GST Bill is passed or the details are available; a formal training should then be provided to all the teams. As a part of the overview on GST, there is enough information/material available on the secondary sources – What is GST?, why GST is required for the country? Various models of GST, Reasons for selecting Dual GST along with the taxes that will be subsumed in GST, etc. This activity will provide an insight into the proposed GST. This will help companies to identify the areas which are directly and indirectly impacting their business processes when GST is rolled out.

The business process of all companies may not be the same; they vary from company to company and also from industry to industry. The various team leaders or owners are the masters of their processes. Once the overview is provided, the teams can identify processes and prepare a plan of action or take it up with the industry bodies to the government’s notice, if there is any impact. Say for example, in the current Excise laws, the inputs for the bulk drug industry are excisable and the sale of bulk drugs is exempted from the Excise taxes. If the same is continued in GST too, the same can be represented to the government. Similarly, in the case of sale of agricultural tractors taxes, there is an element duty reversal on inputs i.e. of reversal of Cenvat Credit of 4% on sales, as agricultural tractors are exempted from duty. Like this, there will be many specific issues which are industry specific and the same issues should be identified well in advance to handle them once the law is in place.

In the previous section we have seen how the change in the tax structure can impact the bottom line with respect to specific contracts. The companies may have huge numbers of contracts and it is very tough to go through all of them in a short span of time. If the concerned teamsare trained, and an overview is provided well in advance, the teams have time to go through all the critical contracts and have a plan of action in place when GST is implemented.

Apart from the purchase of goods and sales contracts, the contracts relating to the service providers also have to be revisited as GST proposes levy of Service Tax by the State Governments also.

It is agreed that petroleum products are outside the purview of the GST. A petrochemical industry which is in the process of setting up a refinery has a huge amount of capital investment. Credit of Excise taxes was available and the same was being used for offsetting the liability on the sales front. But with GST, the credit of GST will be available on the capital goods and services but the output is not liable under the GST, so the company cannot utilize the same. If the finance team is trained in GST they can take the best decision on the same based on analysis of availing credit or not etc. Given below is the gist of the cases where they can do an in-depth analysis and recommend the management accordingly

1. If credit is not taken the recoverable taxes can be added to the capital cost and depreciation can be availed.

2. If refund is applicable, then companies can apply for the refund

3. If it is decided that credit can be retained, the same can be used, in future.

The finance team will be able to take a decision only if they know about GST, which is possible only through training. Based on the in-depth analysis the finance team can take a decision which is best for the organization keeping in view its impact on the bottom line, cash flows, etc.

Training plays a critical role in organizations for transition to GST. This will help them to reap benefits of the tax reform. The earlier the organizations adapt to the changed tax laws, the more benefit they will enjoy compared to their competitors.

2. Registration Number

For any taxation system to work effectively the heart line is the registration number. The tax registration number helps in tracking the transactions and also tax payments made by the registered dealers.

In the current indirect tax regime, we have multiple registration numbers as there are different taxes being governed by different tax departments. Reports have to be filed submitted based on the registration number, this increases the complexity even more. Under the current tax regulations in India we host of tax registration numbers like the Excise Control Code (ECC) for Central Excise at the factory level and if an organization has multiple manufacturing units, they have multiple ECC numbers; likewise for Service Tax – another registration number and Value Added Tax, one registration number for each State called Tax Identification Number (TIN number) and Central Sales Tax another registration number. Added complexity is there are different reporting requirements and coordination between the departments to be filed at different time interval. The above challenges give room for tax evasion, which results in loss of revenue to the Central and State Government.

Under GST it is being proposed to have a single registration number based on the Business Process Document issued by the Joint Committee, there is only one registration number for all the taxes and the same is at state level. The registration number under GST is called Goods and Services Identification Number (GSTIN) and this required to be mentioned in all the business documents like invoice, debit memo, credit memo etc. Apart from this another number is required to be obtained known as Input Service Distributor Number, this is required in case of services if the organization has multiple office at different locations and wants to avail and pass on the credit on the purchases of services to the manufacturing unit.

The data structure of GSTIN

GSTIN

The first two digits, determine the state in which the GSTIN in being obtained, the list of the states is based on 2011 Indian Census. Under this each state will be allocated a two digit number.

Next 10 digits are PAN number of the entity issued by the Income Tax Department.

Thirteenth digit is alpaha numeric and it is based on the users requirement to get registration based on the business vertical. There can be 35 sequences maximum for this 1-9 numbers and alphabets a – z . If the tax payer is going for a single registration then it will be 1 in the thirteenth field but if he goes for more than one registration like one two business vertical say for example one for consumer durables and another for automobiles then the second one will be having 2 in the thirteenth number and the third registration number will be having 3 in the thirteenth field.

14th digit is a being reserved by the GSTN for the future use and the 15th digit is check digit.

The business houses now have to collect the data with respect to the registration number in a centralized location with respect to the locations where it has factories / warehouses, branches and   authorized signatories at the respective locations. This activity will take at least two days to 10 days based on the volume and geographic spread of the business.

3. Contract renegotiations

The second important thing when GST is rolled out is contract renegotiation. All the business contracts are based on the assumption of continuity of business and with a clause of, “All applicable taxes will be extra as on date of delivery.” If the contracts are drafted in the above fashion then they are not required to be renegotiated as the existing taxes like Excise, Service, VAT and CST will be replaced with the CGST, SGST and IGST Taxes since the wording ‘applicable’ tax is used in the contract with respect to taxes.

Cost being a crucial element in the business, it determines the bottom line. Some organizations are entering into contracts to pass on the tax implications to the seller; the organizations are more interested in the supply of the goods and services at a pre-determined price inclusive of taxes. Such contracts are normally for the taxes which are not recoverable in nature like the CST and some costs like freight, insurance, packing, etc.

Under GST, the taxes are based on value addition and all taxes being recoverable, will have an impact on such contracts. The impact can be on the selling side or on the buying side based on the party to the contract. If it is on the buying side, there would not be much impact as the taxes are inclusive; hence the cost of procurement will be low, thereby reducing the cost of production and cash outflows. On the selling side, it has a huge impact on the transaction value as well as on the bottom line.

For example, considering A and B are from different States and if A agrees on a contract to supply item X to B, at a price of Rs. 10,000 on following terms: exclusive of Excise Tax, inclusive of all other applicable taxes and other costs like packing, freight and insurance. Packaging based on B’s Specifications.

Based on the contractual terms, the tax applicability under the current tax regulations for the transaction will be, Excise Duties @ 12.5% and CST of 2% against ‘Form C’ and packing cost based on B’s specification is Rs. 500. Excise duties are recoverable as A & B are registered dealers and item X is excisable.

The invoice values will look like this pre GST implementation:

pre GST implementation

In this case, the extra cost for Dealer A is Rs736 (Rs500 for packing plus Rs236 on account of CST). B, on the due date will pay only Rs. 11,313 (Rs. 12,052– Rs. 736) to A

Now let’s extrapolate the same example when GST is rolled out, keeping in abeyance the actual rate, assuming IGST of 18% (when GST is rolled out it may be less). When GST is rolled out the transaction will be like this:

1123

Since the contract says ‘exclusive of Excise’, there are no Excise Taxes under GST as Excise Tax is subsumed with CGST when GST is rolled out. And A Ltd cannot charge IGST to B Ltd on this transaction, as it says ‘inclusive of all other taxes and costs’. As per the contractual terms IGST is to be borne by the seller A Ltd. This means an additional cost on the transaction for Rs. 1,654, which is the difference of IGST plus packing charges CST [Rs. 2,390 (Rs. 1,890 + Rs. 500) – Rs. 739]. This will straight away have a huge impact on the bottom line of B Ltd.

When GST is rolled out all sellers like A Ltd will have to review their contracts and re-negotiate them, if they do not do that, then they have to take a huge hit on their bottom lines, which will in turn impact the stock prices on the bourses if they are listed companies.

If A Ltd wants to amend the contract, it has to renegotiate, and say that ‘all applicable taxes will be extra’ and including costs like packing, freight, etc. This activity has to be done much before the rollout of the GST so that there are no last minute surprises.

Even the service contracts have to be re-negotiated as there will be a service component levy by the State Governments. Apart from the sale and purchase of goods contracts, the service contracts as well as the Annual Maintenance Contracts have to be re-negotiated if they are have contractual term of inclusive of applicable taxes or Service Tax.

Say for Example X Ltd is service provider and Y Ltd is service receiver. X Ltd enters into a contract with Y Ltd for servicing of machinery onannual basis in business parlance called Annual Maintenance Contract (AMC) with the contract term as “inclusive of all applicable taxes for service component only and for material at actual costs and taxes on them if any applicable on the date of servicing”. The contract is valued for Rs. 10,000. During the course of the year, X Ltd renders the services and he does not replace any material so the invoice is only for the Service Tax and X Ltd issues an invoice as given below

1234

On the due date Y Ltd pays Rs.10,000 to X Ltd only for the cost of service as it is inclusive of Service Tax based on the contract terms. In this case X Ltd treats the Service Tax as is cost.

Now let’s see if the same contractual terms are applicable once GST is implemented. For academic purpose let’s take CGST on services @ 10% and SGST @ 8%. The invoice under GST will be like this

12345

On due date, Y Ltd pays X Ltd Rs. 10,000 only as it is inclusive of taxes. Under GST, X Ltd has to pay total tax of Rs. 1,800 (Rs. 1,000 for CGST Service & Rs. 800 for SGST Service). It means his total tax cost on this contract is additionally for Rs. 350 (Rs. 1800 under GST – Rs. 1450 under previous tax regime). If X Ltd does not renegotiate the contract, it has to take additional burden on his profit for Rs. 350. There will be many such contracts, this will ultimately reduce the profits of X Ltd.

Rewriting of contracts is not a simple task; it will take lot of time and require lots of negotiations and approvals from various operations heads. The earlier such things are put in place, the better from the organization point of view.

In most cases when the contracts are re-negotiated, the same has to be sent for approval to the legal teams also, apart from the operationsheads. This is done to safeguard the interests of the company in the long run.

4. Change in business process

In the current taxation the levy of incidence of taxes is different for different taxes and as result the treatment for taxes is different. Excise is levied on manufacturing, service tax on completion of service or raising of invoice, VAT on supply of goods etc.

Some of the business process have to be revisited or re-engineered keeping view of the changes   under GST. The business process which need change are

a. Branch / Depo Transfers

In the current tax regime while moving goods from factory to depo / branches excise duty is paid and goods are removed based on the excise valuation rules in place. Going forward in GST, the same is applicable but it is not only for CGST but also for IGST. This process of tax defaulting on the transaction has to be redesigned and also keep track of the same. In case if the transfer of goods between the factory and the depo / branch in the same state, the treatment may be different. In case of different state, IGST will be applicable and charged on the transaction.

b. Trading

Under the current tax regulations for central excise, the taxes on purchases are passed on the sales and also a register to be maintained. Going forward under GST the same is not required as it is on supply of goods and services, so the taxes have to be applied on the supply price. This means that that credit of taxes on purchases is applicable and the same can be used for payment of output tax.

There will be no longer required to maintain the registers.

c. Job Work

Another import decision which the business have to take care is regarding the job work i.e make or buy when goods and service tax is implemented. Under the current tax regulations, the material is sent for job processing under a challan. Tax is levied on the value addition and goods are received back under the same challan and no excise duties are paid if the same are received back in 180 days else duties are liable to be paid. Based on the available information in the public domain, the process is not clear under goods and service tax. The following are the possibilities

  • Current business process may be continued, if this is the case, then there is no need to make any change in the business process.
  • As goods and service tax is on supply of goods and services, job work can be also be considered as supply, if this is the case then taxes have to be paid on shipment of goods for job work, the job worker will take credit of the same and ships back the goods when processing is done along with taxes. This involves lot of changes in business process as well as additional outlay of funds for tax payments.

If the second option is followed then the business have to take a call on make or buy decision.

d. Deemed Exports

 In the current business process, exemptions are available for deemed exports but going forward under GST, exemptions are no longer applicable and refund process has to be followed. This means additional cash outflow initially and also wait for the refund. With the approach, the business have to take call to make supplies for deemed exports houses like EOU’s / SEZ’s etc.

5. Impact on Costing of Products and Services

Input costs of goods and services are the key in determining the cost of products or services apart from the overheads which contribute to it indirectly. For any manufacturing unit, all the items or componentswill not be available for procurement from the same State. They have to procure the same from other States. When they are procured from other States, the organizations have to pay Central Sales Tax and this is not recoverable in nature. When GST is rolled out, the organizations still have to procure the same from other States, but the only difference now is that the CST, which is2% against Form ‘C’, will be replaced with IGST, which can be about roughly 18%. For this, the manufacturer has to pay the seller for the item price along with the increased taxes, which in turn increases the working capital; this leads to increase in the interest leading to higher overheads.

Another paradigm shift in GST is, taxes will be based on the destination principle unlike the current principle of origin-based. In the current scenario, the procurement is made from a vendor who gives the lowest price coupled with the percentage of non-recoverable taxes. Under GST, the credit is available only when the seller remits the taxes. The challenge is now on how to prepare the monthly costing statements which are used for various decision making process in the organization. Material cost has to be considered after taking the relevant credit on assumption basis? If this is the approach and down the line if the seller does not remit the taxes then it has to be added to material cost and this will increase the cost of the product but decision is taken on assumption that credit is available and such situations can lead to a huge impact on the bottom lines of the organizations.

In case of services, under GST the States are also given the power to levy the same. If the service provider is not a registered dealer with the tax authority, then credit cannot be taken, if registered, credit can be availed. This will again have an impact on the costing of the product or service as the tax will be treated as expense and added to the landed cost. If the service provider adopts or goes for the composite scheme, then the final impact will be known only when the actual bill is announced. In most cases, the credit for the taxes is not available if the supplier or service provider opts for the composite scheme and this will increase the cost of the products or services. In order to survive in today’s competitive market the inputs costs have to be minimum, to attain this again the contracts have to be revisited and if required change the supplier or service provider to maintain the cost competiveness.

There will be certain services on which credit cannot be taken, like Service Tax on banking charges; though the amount may be less, the total cost will go up on account of introduction of Service Tax by States also. All these have to be observed and the costing details have to be reworked before fixing the prices in the new tax regime else there will be an impact on the bottom line for the organization be it a listed company or an unlisted entity.

Now it is clear that under GST, the credit for the input taxes is available only when the supplier remits the taxes to the government. This means there is a time lag between the receipt of the material and credit availment i.e. the input tax credit cannot be utilized for making the payment of the output tax immediately. Which means output tax liability has to be paid through cash, which means increase in working capital costs, resulting in increased overheads. The buyer will come to know about this only when the government rejects the invoices for which claim is made and submitted but the same is not paid by the seller. This means that while purchasing goods or services, the seller’s history of tax payments also has to be considered else the tax will be treated as non-recoverable thereby impacting the bottom line of the organizations.

6. Working Capital Management

Working capital is the lifeline of any business. Working capital is required for day-to-day operations for meeting cash expenses, for payment to vendors, for payment of salaries, etc. Working capital is financed by the banks based on the current asset ratio, the Gross Current Assets of the company and other current liabilities (i.e. excluding CC limits, term loans etc.

Impact on working capital will be increased due to the following reasons

a. Increase in tax rates

b. Removal of exemptions

c. Change in input tax credit mechanism

d. Service Tax to be levied by states also

a. Increase in tax rates

 In GST the number of taxes are being reduced, this is a welcome gesture as the complexity and tax administration is minimized but the flip side is there will be an increase in the tax rates. Under current tax regulations today when goods are procured from neighboring states only CST is being paid at the rate of 2% or 1% based on the exemptions availed by the seller. In GST CST is being replaced with IGST which is a sum of CGST plus IGST and the total of these two expected to be around 18% and even more in case of sin goods. The taxes rate will be increased from 14.5% (12.5% Excise duties plus 2% CST) to 18%, this means an increase in tax rate of about 25% (18%-14.5% / 14.5%).

This has an immediate impact on the cash outflows as the supplier has to be paid normally within 30 days if goods are procured on credit basis and if in on cash basis the impact will be even more. In most of the organizations about 20% to 30% of the goods are procured from other states, in some case it may be more also. Keeping in view of this, the organizations have to plan accordingly.

b. Removal of exemptions

The basic objective of GST is rationalization of goods and services taxes which means that goods and services will be taxed in same manner and lesser number of exemptions. Currently under central excise there are around 300+ items which are taxed at lower rates and going forward under GST, these exemptions will be removed that means the cost of these products will go up along with additional cash outflow.

Today for overall balanced economic development in various locations excise exemptions are granted to promote industry. Under GST, these exemptions will no longer be applicable for new units and also for the existing units it will supported till the sunset clause. We need to wait for the actual bill to see who the same will be handled. In case of the exemptions are removed asking the existing units to levy GST during supply and apply for refund, the organization will have to pay additional funds.

c. Change in input tax credit mechanism

In the current taxation, credit of Excise and VAT is available on the receipt of goods based on the invoice. The credit availed on receipt of goods in case of Central Excise and VAT and on receipt of Invoice for Service Tax helps the business to adjust with the output tax liability to be paid during the month end. This will help in the cash flows as there is no need for additional cash to be spent and it is taken on the accrual basis i.e supplier payment is not a criteria for availing the input tax credit.

Under GST the input tax credit is available only when the supplier pays the taxes. This input credit will be validated for the buyer based in the GST2 based on the GSTR1 filed by the seller. This means that credit cannot be taken immediately on receipt of goods or service invoice. The seller may remit the taxes in the immediate month or subsequent months, the longer the seller delays the tax payment the longer period the buyer has to wait to avail the credit. This process means the cash out flow for payment of taxes will be more i.e increased in working capital limits. In case if the buyer avails the credit without linking to supplier payment in GSTR 2, if the seller does not pay the taxes, the same will be reversed with penalty i.e additional outflow. Government has proposed this approach to reduce the revenue leakage.

d. Service Tax to be levied by states

Currently under the existing constitutional provisions service tax is being levied by the center government but under GST states are also entitled to levy service tax. This means additional taxes to be paid on the service being procured like security charges, finance charges, courier charges etc.

Under the current tax regulations, the service tax is charged at 14.5% including SwachBharathCess of 0.5% with effective from 15th Nov, 2015. Under GST the tax rate is proposed to be around 18% as per the recommendations of the chief economic adviser. The service tax will be increase by around 25% ( (18%-14.5) / 14.5%).

Under todays conditions service tax is be paid on all services, this means additional outflow of funds i.e impact on working capital. Companies have to plan accordingly to meet the cash flows.

The working capital requirements is going to be increased to an extent of 5% to 10% minimum based on the size of the operations and nature of the business. In some cases it may even go up to 20% also. Increase in working capital means, increase in finance costs, which means increase in overhead and ultimate increase in the cost of production. In today’s competitive market the business have to take a call to pass on the increased costs or absorb the same. Absorbing the same means decreases in bottom-line or increase in selling price means decreases in the topline.

While evaluating the purchase proposals, care should be taken on the genuineness of the seller also going forward apart from the price, quality of supplies, timely delivery.

7. IT Systems

Nowadays, most companies are using various accounting packages or enterprise resource planning software’s of various vendors. All these packages are designed specific to Indian requirements as taxation is applicable on movement of goods, unlike in other countries, on invoicing.

For GST to be rolled out, the one hundred and twenty second constitutional amendment bill has to be passed in both the houses of Parliament and then ratified by at least 50% of the States in their Assemblies. Once this process is done or during this process, the government is planning to introduce the actual GST Bill. The last two sessions of the parliament were washed out for whatever be the reasons. We need to wait and watch for the budget session scheduled form 23rd of February 2016.

Since IT plays a critical role in today’s business, ERP’s or the accounting software’s should be changed to meet the new tax requirements in the following areas

a. Provision to capture the new registration number for GST – GSTN

b. Infrastructure to enable input tax credit only on supplier payment

c. New reporting requirements

d. Revising of the current transaction processing

a. Provision to capture the new registration number for GST – GSTN

In the current systems the tax registration numbers are captured at the manufacturing plant level in case of ECC, Service Tax at national level, ISD in case of the client’s business requirements, VAT at state level and for CST again at state level. In GST, the GSTIN is at state level and the same registration number is applicable for all taxes. The existing registration numbers have to be end dated and provision for the new one has to be provided by the accounting software / enterprise resource planning software vendors.

This information is available based on the business process document on Registrations issued by the Joint Committee.

b. Infrastructure to enable input tax credit only on supplier payment

In the current tax regulations input tax credit is available on receipt of goods and the same is being supported by the accounting software’s or enterprise resource planning vendors. Under GST the same is being shifted to payment of taxes by the supplier, to track that the existing mechanism will be very cumbersome as the user is expected to query for each and every receipt and update the receipt accordingly.

As it is confirmed, the accounting software / enterprise resource planning software vendors can come out with a design where the user can query based on supplier or invoice number and update the same accordingly.

Apart from this, there is also change in the credit utilization i.e offset against each tax. Changes can be made in the accounting software / enterprise resource planning software vendors so these will save time for them to develop when the actual details are available.

c. New reporting requirements

Under the current tax regulations the business houses have to file around 400 + returns / declarations / annexures by whatever name we call it if they have presence across India. This means the business houses need to have dedicated team of indirect tax professionals to file them on monthly / quarterly or yearly basis. These returns or reports are different for central and states and differ from state to state.

This complexity is being done away in GST and the business houses have to file four to five returns for both the central and state reporting.

The reports to be filed under GST are

GSTR -1: to be filed on monthly basis, uploading transaction wise details for B2B transactions and for B2C with different conditions. It has to be filed by 10th of the subsequent month

GSTR -2: to be filed by the buyer and it will auto populate the credit for the invoice for which supplier has paid the taxes and buyer can also upload adjustment documents like credit memos, debit memos etc.

GSTR – 3: to be filed by the buyer and it will show summary of the purchase, sales, tax paid, adjustments if any etc

GSTR – 4: quarterly return to be paid by dealers who have opted for compounding scheme under GST

GSTR – 5; return to be filed by non-resident tax payers

GSTR – 6; monthly return to be filed by input service distributor

GSTR – 7: to be filed by tax deductor

GSRT – 8; annual return to be filed by the sellers with for the year showing the sales, purchases, services details, tax break up for input tax, output tax, etc

All the above returns have to he developed and tested by the accounting software / enterprise resource planning software vendors.

d. Revising of the current transaction processing

In the current accounting software or the enterprise resource planning software’s the purchase and sales transactions update the Excise records like RG 1, RG23 A Part I/ II, RG 23 Part C Part I / II etc and with rollout of GST all these registers should not be updated. To stop updating the relevant changes for the software must be done.

To make all these changes the accounting software or the enterprise resource planning software’s have an option to release a new release or a solution with the changes.

8. Future Expansions

In India most of the decisions related to setting up of new manufacturing facilities is based on tax exemptions provided by the State Governments or based on the geography or economically backwardness of the area, etc. Taxes play an important role as the governments may give Sales Tax exemption, i.e. exemption from sales tax for a certain period or deferment, i.e. Sales Tax will be collected from the buyer but will be deposited to the tax authorities after a period of time. The deferment of Sales Tax helps in cash flows for the company in the initial years. Apart from this, there are exemptions related to land registration fees, stamp duty, etc.

The tax exemptions have helped in India for States like Himachal Pradesh and Uttarakhand. But going forward in GST, these exemptions do not have any meaning as the taxes will be based on the destination principle as against the origin principle.

The latest constitutional amendment bill has laid down very clearly that the exemptions are to be decided by the GST council and some of the States are clearly stated in the bill for attaining balanced growth. Based on the recommendations of the GST council, the exemptions to the States will be granted.

The current exemptions will be applicable till the sunset clause and there will not be any change. The current exemptions for Excise may undergo some change as the destination State will not get any tax if goods are shipped from an exempted locations. We will come to know the exact process when the actual GST bill is made available to the public.

The future decisions for setting up of industries will no longer be based on tax exemption but on factors related to the nearest point for supply of raw materials or place of consumption. If the industry is close to the place of supply of raw materials, the transportation costs will be minimal; or if it is near the place of consumption too, the transportation costs will be less and the cost advantage will be passed on to the customers.

This approach will bring a paradigm shift in the decision-making process of setting up of industries. This method also leads to development of all geographic areas as there is no skewed benefit of taxation.

Even though GST is dubbed to be mother of all indirect tax reforms in India, there quite a few challenges in rolling out GST as well as corporates adopting GST. To have a smooth transition, a detailed action plan has to be prepared and executed in a timely and meticulously to be an early adopter and reap the benefits of the at the earliest.

Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

(Author has written book titled “Roll Up Your Sleeves for GST, The Impending Tax Reform in India” and can be reached at mallikarjunagupta@india-gst.in)

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