Issues and Challenges In Implementation of GST
Goods and Services Tax (“GST”) shall have a transformational impact on the industry. As GST levy is based on supply as opposed to Excise which is levied on manufacture and VAT which is levied on sales, it fundamentally alters the way of doing business. GST shall make India a common market, thus decisions like setting up ware houses and supply chain management shall be revisited. Even decision of setting up new units shall consider the impact of GST. As area-based concessions will not be renewed, impact of additional costs shall be determined. Even impact analysis with regard to rate of tax must be done when the rates are finalized by the Government. This is very important because rate of tax under GST is bound to be different from the existing rates and hence it shall have tremendous impact on the prices of the products/ services.
Under GST, most of the indirect taxes shall be subsumed. Input tax credit shall be seamlessly available and hence some taxes like entry tax, LBT, CST, etc. which were hitherto costs shall be eliminated. Even certain credit reversals currently prevalent under State VAT will be removed and thus cost to that extent will go down. Any change in costs shall have change in the pricing of the products as well. In such scenario, to remain competitive, businesses shall have to start readjusting their prices of finished goods/services considering the GST model. Reduction in supply chain costs shall also result in impact on the prices of finished goods. It must be noted that when GST comes in force, price adjustment cannot be done all of a sudden. Proper analysis and planning is must beforehand so that appropriate response can be given on implementation of GST.
Changes in ERP:
As GST Model is fundamentally different from Excise & VAT existing ERP systems shall require complete overhaul. As tax will be paid on supply (including to oneself), ERP shall be calibrated to account for such transactions without affecting the sales for financial reporting. Under GST, SGST shall be paid in every State from where intra-supply is made and even CGST (though Central levy) shall be paid in every State separately to the extent of intra-state supplies made from that State. IGST shall also paid in every State from where supply is made on inter-state supplies. ERP shall also enable mechanism for taking action when the input tax credit claimed by receiver does not match with the input tax credit shown by the provider. Even ERP shall be required to provide facilities for generating new set of documentation for movement of goods.
Current set of contracts are drafted keeping in mind the provisions of current law i.e. Excise, Service Tax & VAT. Under GST, all the contracts shall require redrafting as provisions under GST are totally different from current laws. Appropriate clauses shall be inserted which deals with various scenarios under GST. Even long term contracts shall be modified to provide for GST liabilities but before that a thorough understanding of contract as well as law shall be required so that appropriate liabilities can be crystallized at the time of modification
All the employees of the organization shall be required to undergo extensive training for GST so that its implications as well as documentation can be well understood and taken care of. Training should encompass all the facets of GST so that empowered employees can take appropriate and correct decisions with the help of professionals when they face any challenge.
Realignment of organizational structure:
GST shall result in creation of new roles and responsibilities across the board as the GST Model shall cover the entire chain of transactions upto the final customer. Current organizational structure shall not be suitable under GST and hence must be realigned. Department of Excise & VAT in an organization shall be merged and new structure of reporting and compliance must be created.
At the time of transition from current system to GST system, lot of aspects will have to be considered. The closing credits as per Excise, Service Tax and VAT must be duly reconciled as the same shall be allowed as opening credits under CGST & SGST. New registration number shall be obtained by submitting prescribed documents within six months from notified date. Unavailed credit on capital goods must be duly reconciled as credit of the same shall be available under GST. Credit shall also be available of eligible duties and taxes in respect of inputs, semi-finished & finished goods lying in stock in certain situations as GST shall be paid on their supply (including branch transfer) later on. Appropriate workings shall be prepared if a person is switching from composition scheme under present VAT to normal scheme under GST or vice versa. In case of job-work, inputs or capital goods removed before the notified date and returned thereafter must be appropriately treated as per law. Supplementary invoices, debit or credit notes where there is price revision must be planned well beforehand to do tax planning, wherever feasible. List of all the pending cases must be prepared and refund must be claimed to the extent of relief with regard to issue of CENVAT Credit on disposal of cases. Treatment of long term contracts, retention payments and progressive supply contracts must be well understood beforehand so that appropriate modifications can be done in the contract to take care of incremental liabilities. Treatment of branch transfers will also be very crucial and must be addressed.