The GST’s top transition challenges
From treatment of closing inventory to modification of IT systems, there are a number of hurdles to smooth implementation
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Implementation of the goods and services tax (GST) from 1 July is on course, with all states and union territories, except Jammu and Kashmir, having passed state GST laws. Also, the government has attempted to relax the requirement for uploading invoice-level details for the first two months of the GST regime. This provides some breathing space for companies to fine-tune their IT systems for reporting requirements under GST. While the government seems confident of being GST-ready, industry is preparing itself to meet several implementation challenges.
Amongst the several transition issues and implementation challenges being faced by the industry are: treatment of closing inventory, adherence to anti-profiteering provisions, modification of IT systems to make them GST-compliant, intra-branch supply of services, and determining place of supply and location of recipient.
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The GST council has, to some extent, accepted industry demand to provide higher relief to traders by enhancing the deemed credit in respect of closing inventory to 60% for goods liable to GST at 18% and above. But given the footprint of traders in the country, there is significant apprehension about the treatment of closing inventory—especially in sectors such as textile, pharma, fast-moving consumer goods, medical equipment, etc., which may lead to lower offtake of products, affecting the industry badly. The absence of transition provisions relating to capital goods in transit on 1 July is also a big challenge for industries.
Another challenge is adherence to the anti-profiteering provisions. The government has issued press releases for the telecom and real estate sectors, with an instruction to reduce the prices. However, on the ground, industry is finding it difficult to identify the quantum of benefit in the absence of specific guidelines on the anti-profiteering provisions. Though the intent is to pass on the benefit to the trader/consumer, the continuing lack of clarity has become a key challenge for industry. The mechanism to be followed for price reduction with respect to pre-printed maximum retail price/retail sale price products is an unknown mystery. The anti-profiteering rules released by the GST council, however, do not address these challenges—including the manner of computation of profiteering, whether the anti–profiteering investigation is to be done at the product or service level, whether losses and gains from various product segments can be set off to determine the product level prices, etc.
IT teams across industries are burning the midnight oil to make changes in their IT systems. Incorporating the recent changes in the reporting of returns is an additional challenge when it comes to being GST-ready. The multiplicity of rates, decentralized registration, generation of item-wise invoice with multiple copies, calculation of item-wise GST for multiple slab rates, and printing of such invoices containing numerous details, have increased the implementation challenge. Lack of clarity on the computation of the customs education cess has left both consultants and companies grasping for clarity.
The generation of self-invoices and issuance of payment vouchers for purchase from unregistered dealers has added a layer of complexity to compliance under the GST regime. While the implementation of the electronic way bill has been deferred, it is expected that this will be issued in some modified form. The requirement of issuing an electronic way bill for every movement of consignments in excess of Rs50,000, and meeting the validity period for each such way bill, is expected to burden the industry’s logistics and supply chain. Also, the limitation on issuance of a single credit note for annual discounts and generation of triplicate invoice, especially where there is no transporter involved, is an added challenge.
There is lack of clarity on determining the intra-branch services, transaction with employees, its valuation, and situations in which they have to comply with input service distributor provisions. The determination of location of the recipient in the case of a multi-location company and the corresponding place of supply adds to the complexity. The treatment of unbilled revenue for ongoing construction contracts for setting up a factory/plant, and whether such contracts are to be classified as work contracts of immovable property, has emerged as a challenge for the EPC (engineering, procurement, construction) contractor.
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Car leasing companies are struggling with a significant increase in tax incidence due to tax rates being linked to the rate of goods. Units enjoying area-based exemption, including exporters, primarily Software Technology Park of India-registered units and export-oriented units (EOUs), are affected owing to the replacement of upfront exemption with a refund mechanism. EOUs are awaiting clarity on the continuation of basic customs duty for determining the duty payable on supply to the domestic tariff area.
Lack of clarity on various transactions, such as procurement and distribution by EOUs, transactions covered in deemed export, treatment of transition stock lying with the job worker, where the job worker is discharging excise duty, etc. are also making the transition challenging.
Industry is expecting the government to issue the requisite notifications soon, including the effective date of GST levy, eligible exemptions and concessions, and negative list of services. Without this, effective transition planning is impossible.
Sachin Menon is national head, indirect tax, KPMG India.
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