Home / Politics / Policy /  Are companies ready for the GST regime?

Mumbai: Even as the government has introduced the constitutional amendment bill for the April 2016 national rollout of the goods and services tax (GST) in the Lok Sabha, tax experts, logistics consultants and lawyers feel most companies are still unprepared for GST.

GST, a crucial reform expected to cut transaction costs for business and boost India’s economy, will replace central taxes like excise duty and service tax and state levies such as sales, value-added, entertainment and purchase taxes. All entry taxes like octroi will also be subsumed under GST.

“Most companies except a few have not yet initiated action to gear up for GST including those which will have major impact on their businesses," said Nihal Kothari, executive director at law firm Khaitan & Co.

Kothari said sectors that have long supply chains such as packaged consumer goods and durables, pharmaceuticals, or service like banking, insurance, telecom and transportation need to “proactively take action in advance" to implement GST to avoid transitional tax losses.

“The changeover to a new tax structure will be challenging for these sectors as they will have to ensure that their business processes, documentation and computerized accounting systems are suitably modified to avail full tax benefit throughout supply chain. It’s a mammoth task and such changes cannot be done in a day," he added.

Manish Saigal, managing director at Alvarez & Marsal, a specialized advisory firm, noted that not many companies have set up hub and spoke-based warehousing networks as those require investment. A hub and spoke network is one which has a centralized facility that feeds the network.

He added that companies largely in pharmaceuticals and packaged consumer goods cannot overnight replace agent-based network that they have extensively relied on for sales and for holding inventory.

“Moreover the investment including cost of real-estate for the relevant locations for hubs has gone up," he said.

The dual GST proposed to be introduced is expected to expand the tax bases and simplify and harmonize the complex tax systems.

While the government is ready with the information technology (IT) infrastructure for GST rollout, companies are yet to look at a GST-compliant IT system for automation of tax calculation, said tax experts.

“It is one of those rare cases where the central and state governments appear ready with the IT infrastructure to support GST while the private sector does not know where to begin as far as the GST infrastructure is concerned," said Amit Kumar Sarkar, a partner at the consulting firm Grant Thornton India Llp.

Sarkar said most companies are awaiting clarification on five critical issues related to GST. These include norms defining a taxable event, a taxable value on which tax is to be charged, a taxable person, place where the tax is to be levied and the relevant time of levying the tax.

“All these important questions will be addressed only after the draft act is published. Till then it will be difficult for companies to automate their systems," said Sarkar.

Vineet Agarwal, managing director at Transport Corp. of India Ltd, said that even though companies are in the process of putting structures to become GST-compliant, there is indeed ambiguity in the GST framework.

Logistic costs form 14% of the value of goods in India versus 7-8% in developed countries, Kotak Securities Ltd wrote in a note dated 16 December. We believe a complicated taxation structure and poor infrastructure are the key reasons for such high logistic cost. “We reckon GST will simplify the taxation structure, which will encourage third party logistics in India, reduce compliance cost, reduce number of warehouses and allow tax credit across the supply chain, making it more efficient," it said.

The Retailers Association of India (RAI), an industry group, is however, confident that retailers will be ready for the new tax structure before it is rolled out in April 2016.

“We still have a year before GST rollout. Retailers are accustomed to multiple tax processes so transition from one system to another will not be a problem. Moreover lots of nuances of GST are still awaited," said Kumar Rajagopalan, chief executive officer at RAI.


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