GST: The road ahead

Pratik Jain, Partner — Tax, KPMG India shares insights on the way forward after GST implementation

Pratik Jain

In 2006, an announcement was made about the introduction of GST by 2010. Achieving one of the biggest indirect tax reforms of the century was not expected to be a cakewalk. Key areas of debate have been the fiscal autonomy of States, compensation mechanism for States in case of loss, ambit of GST, etc.

After hectic parlays, including firm commitments towards compensation on potential revenue loss to states and acceding to their demand on levy of a non-creditable GST on inter-state transactions, the Union Finance Minister was able to reach a broad consensus which saw the Constitutional Amendment Bill (the Bill) being reintroduced in the Parliament in December 2014. Hopefully, the Bill will be passed in the budget session. This could further brighten the chances of GST getting implemented from April 1, 2016.

GST may significantly impact the pharma sector in many areas. The first challenge could be to determine the rate of GST on pharma products, which generally attracts a concessional excise duty as well as a state VAT. Further, many life saving drugs are completely tax exempt. GST, by definition, is based upon the concept of minimal exemptions and concessions. Therefore, the current exemptions/ concessions may not continue under GST. Further, the entire margin across the distribution chain would be subject to central GST, which is not plausible as central excise duty is currently not applicable beyond the manufacturing stage. This could, thereof, impact the
pricing of these products, significantly.

The quantum of benefits currently derived by the units operating from the excise free zones may undergo a change owing to conversion of current exemptions into a refund scheme. The mechanism for computation of GST refund needs to be worked out to protect existing benefits are under the new regime.

There could be significant impact on the supply chain, both in terms of sourcing as well as distribution. Tolling and contract manufacturing arrangements may need to be reviewed in light of fundamental changes in law like; removal of central sales tax, GST on stock transfers and liberal credit system. Similarly, the warehousing strategies may need to be reviewed, as in absence of CST multiple warehouses may be less attractive. However, the Bill provides for introduction of non-creditable, one per cent additional tax (in addition to GST) on inter-state supplies, which may continue to distort the otherwise efficient supply chain under the GST regime.

As GST is expected to have a liberal credit regime, tax paid on most goods and services should not be a cost and could have a positive bottom line impact. However, overall cash flow requirements may change owing to the principles of minimal concessions and exemptions, levy of GST on stock transfers, possible higher GST rate on imports, etc. Further, the current IT, MIS systems and processes could require huge upgrades to meet the GST requirements.

GST implementation may still take some time, but the question before the industry is how to prepare for the new regime. Clearly, given the magnitude of changes that need to be done, the preparation needs to start now.

The first step towards transition may be to assess the impact of GST on business. This could then help in preparing an action plan for the transition and identifying the points on which the industry needs to initiate advocacy efforts with the government. The action plan may need to include several important aspects such as, communication with vendors/ customers, treatment of transition stock, pricing strategies, changes in systems and processes, etc.

GST may not only change the tax system in many ways, but may change the way business is conducted.

(Disclaimer: The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in India)

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