India is committed to implement Goods and Service Tax (GST). GST is expected to be implemented from April 2017 or a little later. The tax system is currently in the drafting stages with a few undecided issues holding up the agreement between the states and the Centre. The implementation of GST does not just involve tax reform, it is instead a complete business reform. Therefore, changing the historical ways of doing business calls for larger challenges and increased sense of responsibility as any slip up can also have the business continuity/ survival risks. This article discusses the various transitional aspects that needs to be looked into and the challenges that the businesses face in doing the same. Various transitional challenges are as under:

Finalising the GST Transition Model:

The first and foremost challenge in the implementation of the GST is to understand what is the right model for your business to implement the GST. Broadly, there are three models as under:

a) Model – 1: In-house implementation Model: Implementing the GST with its own internal team by developing a core GST Team. This can be an appropriate model when the system and controls are well-organised and the company has separate tax team with complete pool of industry knowledge and the knowledge of taxation apart from the resources to execute the plan.

b) Model – 2: Out-source implementation Model: Outsourcing the entire GST transition aspects from planning to execution to outside professionals. This can be apt where the size of the business is very small and the company does not have any resources in manpower and expertise in the taxation either to plan or to execute the GST implementation.

c) Model – 3: In-House + Outsource implementation Model: Developing a core internal GST team plus obtaining the assistance of professionals as a knowledge partner. In this model, GST is implemented with collaborated efforts of internal team and the outside professionals clearly dividing the roles and responsibilities of internal team and the external experts. This is more appropriate model for major of the companies who have fairly decent capacities in respect of the executing manpower and knowledge of the taxation system. The capacity and the knowledge can be optimally utilized by partnering with the professionals.

Credits Transit, Maximization, documentation, Methodology:

Various transitional provisions has been prescribed to deal with transfer of credits in the GST regime. However, transition of credits is going to be a big challenge in the GST regime especially for the following businesses:

  • Where credits in books are not reconciled with returns over a period of time;
  • Book stocks never match with the physical stocks. There is no regular stock taking exercise being conducted;
  • Tax invoices received from vendors not being properly documented, Tax invoices not being obtained at all;
  • Ineligible and improper credits are availed in the books and returns with no sanctity checks on the credits;
  • Credits are missed either due non-availability of credit availing document or missed due to oversight or credit assumed to be ineligible which is actually eligible or credits missed transferring in return from the books. Such businesses must run a credit check for the last one year and avail the credits where possible.

The Transitional provisions relating to transfer of credits are not clear and provides multiple views. Further, certain aspects of transition of credits are not at all dealt with in the revised model law also. For instance, the methodology for transit of credit availed on Spectrum rights which has to be availed over a period of 3 years has not been provided in the model law. It is not clear whether the balance 2 years credit can be transferred to GST regime or not. There are many more practical issues in credit transition. Therefore, proper care must be taken while availing/ transferring the credits ensuring due compliance of the law. Whether to avail the credit of disputed items could be a vital decision which would require legal confirmation considering the latest case laws as also the time limit of 1 year of the invoice. Further, businesses must have proper documentation, trails in place to establish the claim of the credit at a later date during departmental audits.

Business Model Re-structuring:

All businesses will undergo a change due to advent of GST. However, the businesses who act and restructure its model as per the requirement of the GST will have a competitive edge over others. Various re-structuring aspects that can be looked into are as under:

  • Whether to change the manufacturing location, principle place of business;
  • Adding locations of supply being closer to customers/ vendors – Making national presence – No state barriers for supply;
  • Shutting down locations, warehousing strategy, Change in supply chain management;
  • Whether floating a new entity for separate business verticals;
  • Management hierarchal/ reporting changes – Robust de-centralised reporting required;
  • Venturing into new avenues;
  • Assessing collaborations, partnerships, mergers – Geographical expansion & business line expansions;
  • Change in Sourcing strategies – Local/ inter-state/ SEZ.

Understanding the nature and extent of the re-structuring along with the time required v/s tie available would be important. Further, actual implementation of the restructuring would be critical task and needs to be monitored.

Transactional Restructuring:

Optimizing the transactions as per the GST shall be the need of every business house to stay afloat in the competitive business environment. However, understanding the various options of restructuring and choosing the best based on the risk/ return criteria shall be key. Few illustrative aspects of transactional restructuring are as under:

  • Strategizing the stock transfers to avoid working capital blockage;
  • Breaking a composite supply into multiple different supplies – For Ex: Combos with aerated drinks in restaurants, Cinema halls;
  • Merging multiple supplies into a composite supply – For Ex: Vaastu, High Rise Premium to be merged with construction;
  • Determining whether a transaction to be restructured as a Composite supply or as a Mixed supply;
  • Clear breaking up the Price to optimize taxes;
  • Revisiting the Discounts policy – Nature of discount, Cash discount or trade discount, whether linked to invoice or not;
  • Security Deposits in lieu of advances to ease cash flows;
  • Reviewing pricing of all related party vendors to avoid disputes in transaction value – Able to establish arms length;
  • Doing away with the policy of raising Mother Purchase Order’s with supplies over a period of time.

This is just an illustrative list, there can be many more aspects to transactional restructuring, therefore a business needs to understand its various business transactions, identify various options of restructuring and apply/ implement the same. The entire exercise could be challenging but its worth the benefits accruing from it.

What if any transitional aspect is not addressed in the GST law:

There are certain transitional aspects which are not addressed in the Model GST law. For instance, Provision for removal of inputs for job-work in the Model law does not explicitly cover direct removal to job worker place from vendor locations and also it does not cover direct dispatches of inputs by job-worker to the principals customer after processing. There can be many more such practical scenario’s which model GST law has not envisaged and hence not covered. Therefore, it poses a challenge on the businesses as to treatment for such cases. Ideally, experts view on the same can be taken and accordingly based on the risk involved proper treatment must be given effect to. Further, the same can be intimated to the department for records purpose.

What if certain transitional aspects are practically difficult to implement:

There can be certain transitional aspects which would be more complex in a practical scenario and there may not be only one view of the same. For instance: Determining the quantum of availing credits based on stock or determining the right pricing for goods/ services in the GST regime considering the anti-profiteering measures. In such cases, businesses shall face challenge in selecting the right approach. Further, the approach adopted may easily be contradicted by the department. Therefore, in such scenarios businesses must have proper documents, evidences in place and if possible get the same duly certified by the competent authorities to establish its claim.

Updation of various GST laws for each state in a quick short time and complying with the procedural aspects of each state:

In embracing a change it becomes crucial for businesses and professionals to stay connected with the change. Government officials are making the laws, revised laws, rules, procedures, formats at a bullet speed. The thoroughly revised and revamped Model GST Draft has been put up in the public domain as recently as on November 26, 2016. Further, upon approval by GST council, soon each state will come up with its own GST laws and there set of rules, procedures etc. In such a fast moving pace, its crucial for businesses and professionals to stay brisk and updated with the current by having a continuous learning and training system in place. Some master trainers must be identified in each department who shall undertake in-depth training of the changes and impart the same downstream.

Determining the right pricing – Anti-Profiteering:

Section 169 of the Model GST law specifically states that in case the Input Tax credit in respect of inputs held in stock is taken then the benefit of the same must be passed on to the buyers. It shall be crucial for the businesses to quantify the benefit and determine the commensurate reduction in pricing that would be required to off-set the benefit. This shall be very complex aspect that the businesses are going to face. The consequences of the same will be faced at the time of departmental audits in the GST regime. Therefore, due care needs to be taken under the guidance of the professionals while dealing with such loosely drafted provisions in the law without clear guidance.

Filing of the last return in the current tax regime:

Filing of the last return in the current tax regime is like a last chance to make good the old issues and start afresh. Based on the impact assessment, complete sanctity check for the last 1 year must be done and the same must be given effect to in the last returns. Missed credits, doubtful credits, credits reversed to buy peace etc. can now be availed in the last return with proper intimation to the department. Transactions overlapping between the two regimes must be clearly understood and correct legal effect must be given in the old returns. Transactions which can be closed profitably prior to GST could be closed. Once the old returns are filed and the time limit of its revision expires then the chance of making changes is less and cash refunds under the earlier law would be the only option. Disputed refunds for credit accumulation could lapse.

Filing of First Return in the GST regime:

Anything when done for the first time poses the high risk of wrongdoing especially when the importance of the task is so high. Therefore, filing of the first return in the GST regime is a crucial task and during transition where all the old credits, taxes etc. are transferred. Understanding the first return and implementing its filing in a correct manner in a first go shall be a daunting task. However, if not done properly then it could lead to issues continuing even post-implementation.

Dealing with un-organized vendors/ customers – Can be obstacle in smooth transition:

Constant communication with the vendors/ customers and their support is very crucial in smooth transition. Carrying along the un-organized vendors into the GST regime is a risky affair. Many aspects of the GST regime such as matching concept, compliances etc. will be perturb the business in GST regime if the vendors are not organized. Therefore, the challenging task of the vendor evaluation/ assessment and their preparedness for the GST must be assessed well in advance during the transitional phase so that the loose link the chain is not carried along to the GST regime. Vendors who understand can pass on the benefit and ensure that the intermediate supplier is not out of pocket when the customer reduces the prices.

Nature and extent upto which ERP system must be tweaked:

Needs of the businesses from ERP shall undergo a change in the GST regime, but the crucial decision making factor is to understand the nature and extent of the tweaking to the ERP that is required to be done to atleast start with. It shall be challenging for the businesses to decide whether to totally migrate into the new ERP or to completely overhaul the existing ERP’s or to list out the various reports, formats, fields that needs to be changed in the existing ERP. Various factors that may help in determining the same could be: Efficiency of current package, Size of business, Time for transition to new ERP, Time left for GST, Support from the ERP vendor etc. Based on these factors business must take a decision as to what immediate changes in the ERP must be done to ensure smooth flow of operations in GST with reduced manual efforts on compliance.   

Performing GST Impact Analysis:

During transition one of the important tasks will be to understand how GST is going to impact your business. Therefore, for that purpose businesses needs to do the GST impact study and analyse the impact. Any action pertaining to transition can be taken only once the impact is known. Entering a new phase without knowing its impact could be a risky proportion. Further, impact assessment helps in channelizing the transitional efforts in the right areas. Various aspects that needs to be considered in the process of impact analysis are as under:

  • Understand self business first – As-is mapping of the business transactions
  • Perform minimum past one year sanity check
  • Credit Maximization, Review of present credits & compliance
  • Performing various ratio analysis to understand the business and its GST impact
  • Assess detailed impact on business as a whole, business transactions and impact on various business departments.
  • Proactively mitigate the risks of the negative impact. Enhance the positive impact.
  • Implementation not restricted to Finance & Accounts department. Readiness and learning equally required by procurement, production, stores, Sales & Marketing, IT, Admin & HR departments also.

Businesses acting early on the GST impact to have edge over competitors.

Conclusion:

Businesses that do not take care in the initial period would face disputes/ demands after 3-4 years of frustration during audit, as they do not have any reconciliations, evidence to prove compliance in the transitional phase. Effective GST transition could result in capturing new customers, safeguarding the present market as well as to protect the present margins. While it is true that ‘Every challenge is an opportunity’, in early study and for smooth transition, the saying ‘a stitch in time saves nine’ is also important.

-CA Madhukar N Hiregange

-CA Ravi Kumar Somani

(Article written on 5th December 2016. This article has also been published in the ICAI National Journal ‘The Chartered Accountant’ in January 2017 edition. For any feedback or queries write to madhukar@hiregange.com or ravikumar@hiregange.com)

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