Primed to transform through a common market
GST can be a game-changer that propels India into the big league of developed nations
Alignment of revenue collection via a destinationbased tax structure for maximum effect is a major benefit of the impending GST regime in the country. The Modi-led NDA Government will always be remembered for historic reforms that align tax laws with the contemporary business environment.
Coming to GST, however, it is necessary to bust a popular misconception that the GST Bill has been passed. What the Parliament cleared was the GST Constitutional Amendment Bill that will permit a simple tax regimen, the Goods and Services Tax, after this is passed separately by both Houses of Parliament. This will happen in Parliament’s Winter Session (26 November to 23 December). At the same time, the 29 Indian states need to ratify their own GST Bills, with minimum 15 states required to pass the Bill for it to become an Act. This will then be India’s biggest tax reform ever.
During the past decade, the issue of reforms in the Indian tax system has held centre-stage at the highest policy forums. In order to reform the tax system according to internal and external factors, the Goods and Services Tax (GST) framework was proposed in the 2006-07 Budget. A consumption or destination-based tax levied on the basis of the ‘destination principle’, GST covers both goods and services and is collected on the value added at each stage of the supply chain. Moreover, GST paid on procurement of goods and services can be offset against that payable on the supply of goods or services.
Indeed, not only will the new system integrate India’s fragmented market into one massive entity, it will also potentially impact financial aspects; the overall operating ones in terms of supply chain, IT system and marketing strategies. Ultimately, it will overhaul the entire Business Model, which as the practitioners of the craft of managing companies, Company Secretaries will look up to and welcome.
A seamless transition to the GST regime entails adopting a business transformation approach. Proper planning and realignment of value chains prior to implementation of GST will impart a competitive edge to organizations, though the intricacies of the new law are yet to be fully comprehended, particularly since the GST rates are not yet decided. Nevertheless, the Draft Model Law on GST gives a clear peep into the fundamental framework of the proposed law and calls for a proactive approach in embracing GST as a strategic opportunity to gain a competitive edge, streamline business models and drive efficiencies to boost profitability and value.
Currently, we have one country comprising 29 different states/ markets. Under GST, there will be one country and one market. Significant cost reductions in supply chain will become possible under GST by rationalization of the warehousing and transport systems. Withdrawal of entry tax/octroi will reduce transit time of goods transported through trucks. Checkposts are likely to be withdrawn, unless required in sensitive places for internal security purposes. In other words, integration of the domestic market via GST will improve economic efficiency and needless fragmentation of supply chains will be minimized. India will be truly transformed into one common market, almost seven decades after political integration.
A uniform tax structure across India will eliminate cascading taxes and curb compliance costs. In a nutshell, GST will be a game-hanging reform for the Indian economy facilitating the creation of a common market with minimum exemptions and maximum compliance. For instance, both service tax and VAT are sometimes charged on a single transaction. GST will eliminate such double taxation, thereby reducing overall osts and boosting the ease of doing business. This will go a long way in rationalizing the overall compliance cost and burden.
The proposed law is a step towards a standard tax law across the country that will subsume multiple taxes under three slabs of GST. The prospective rates of the three slabs may be: a lower rate of 12%; a standard rate of 18%; and a higher rate of 30% or more. While the lower rates will apply to food and other important products, the standard rate would be applicable to other goods and services, whereas the higher rates will be imposed on premium, luxury and ‘sinful’ products, including liquor.
Recently, contentious issues have emerged, particularly in sectors such as e-commerce, artificial intelligence and other IT/ ITeS-enabled products/services. GST proposes to introduce concepts of ‘Electronic Commerce’ and ‘Electronic Commerce Operator’, thereby aligning tax laws with today’s business environment. Also, with GST, e-commerce operations can be streamlined to a great extent.
Under the existing indirect tax regime, particularly for transactions such as sale of software (especially via download or transfer through electronic media), renting of goods, sale or supply of products through e-commerce portals across India, ambiguity often prevails vis-à-vis the jurisdiction they come under. The model GST has a clause stating that Central and State Governments will clearly notify what constitutes supply of goods and not services, what constitutes supply of services and not goods and what constitutes neither of the two, which will be helpful in providing impetus to the Digital India initiative.
Considering its vast benefits, GST can finally be the game-changer India Inc. was eagerly awaiting. The author is President – ICSI