Demystifying challenges in embracing Goods and Service Tax in India – Part I

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 top line 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 roll out of GST and also to have continuous business  operations without any interruptions

  1. Training of the teams
  2. Registration Number
  3. Contract renegotiation’s
  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 teams are 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

  • If credit is not taken the recoverable taxes can be added to the capital cost and depreciation can be availed.
  • If refund is applicable, then companies can apply for the refund
  • 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.

  1. 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


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.

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