GST impact on Business

Introduction of GST in India

On July 1, 2017 President Late Pranab Mukherjee and current Prime Minister Narendra Modi rolled out the GST in a special midnight session which both houses of parliament attended. This reform is expected to unify the $2 trillion economy under one tax umbrella.

The objective of incorporating the GST is to remove the current imperfections prevalent in indirect taxes and improve tax compliance; this will mitigate the effects of costly taxes cascading onto the end consumers. Its implementation is also expected to trigger growth in business and economy in India. While the GST is anticipated by many as to be the driving force in catapulting India’s economy through “one nation one tax”, it has encountered many roadblocks as well. 

One of the opposition largest concerns is the potential negative impact the GST will have on the lower- and middle-class populations due to lack of knowledge and understanding.

What is GST and how it works?

GST is a comprehensive, multi-stage, destination-based tax that will be levied on every value addition. These elements can be broken down into their separate components to simplify what this tax reform accomplishes.

Multi-Stage

The “multi-stage” element of the GST refers to the stages in the supply chain. This is the process of when raw materials are transformed into manufactured product, warehoused, moved to the retailer, and subsequently sold to customers. 

Value Addition

“Value addition” refers to the increased value that a product gains at each stage of the product life cycle. For example, if a manufacturer intends to produce a pair of cotton pants, first they need to buy the raw material. When the raw material is processed into a pair of pants, it receives a higher value. When the pants are sent to the warehouse, a label is attached to it thereby increasing its value further. Subsequently, the value further increases when the pants are finally sent to the retailer and money is spent on marketing the pants.

Destination-Based

A “destination-based” tax moves away from the old tax practice in India where an excise duty would be levied on manufacturing and a subsequent VAT (Value-Added Tax) to be levied on the other stages of the product lifecycle. The reform imposes the GST at each point of sale. For example, let’s say a product is manufactured in State A, but the final sales takes place in State B. State A would receive the revenue for manufacturing and once the product is sold, State B receives the tax revenue for the sale.

One of the GST’s key impacts is its capacity to eliminate the effect of cascading taxes on consumers. The cascading tax is applied to a product at each stage of the product lifecycle. In turn, each seller in the supply chain will attempt to recover their losses due to the tax levied on them by the previous seller, building up at each successive stage until the final cost burden is shouldered upon the consumer. The GST resolves this by allowing the individual parties of the supply chain claim credit for the taxes they are paying, effectively lowering the end cost for consumers.

The GST is composed of three different goods and services taxes.

• CGST: Revenue is collected by the central government
• SGST: Revenue is collected by state governments concerning intra-state sales
• IGST: Revenue is collected by the central government concerning inter-state sales

A couple of notable items with special exemptions and/or delays under the GST are petroleum products and alcohol. Petroleum products – such as crude, diesel, motor spirit, and natural gas – are still not subject to taxation under the GST as government approval is pending. Alcohol is also currently not taxed under the GST.

GST Rates

While initially GST was planned to be implemented as a single rate tax, eventually the government introduced four tax slabs so that daily necessities and luxury items could be levied at different rates. Current GST rates applicable to commodities and services are- 5%, 12%, 18%, and 28%.

Impact of GST on Small and Medium Businesses

No.	POSITIVE IMPACT	NEGATIVE IMPACT & CHALLENGES
1.	Ease of starting businessWith a centralized registration, GST has eased the process of starting a business and consequent expansion. With GST easing the process of starting a business, we can see a spike in SME loans in India from an alternate class of lenders such as NBFCs.	Technological DifficultiesNot all SMEs are technologically skilful to handle the online GST mechanism. They are not aware of the practical details of GST filing online.
2.	Low Tax Burden and Ease in Filing ProcessPrior GST, SMEs had to deal with multiple taxation systems prevailing in the country. With GST wiping out all the cascading taxes, it has reduced the tax burden on over 60% of small dealers and traders.The GST Council hiked the threshold turnover for the composition scheme from Rs. 75 lakh to Rs. 1 crore. The scheme allows SMEs to pay 1-5% tax without going through the tedious formalities.	Blockage of Working CapitalWhile in the previous indirect tax regime, exporters enjoyed upfront exemption of tax on exported goods, this is not available in the current regime. Tax refund delay has blocked funds affecting competitiveness. Blockage of working capital can create liquidity crunch for SMEs. To overcome this, they need to apply for business loans to ensure their running costs aren’t impacted.
3.	Improved LogisticsUnder GST, there will be no entry tax on goods sold in any part of India. This will expedite movement of goods across the nation, thereby improving logistics. According to CRISIL, this will reduce logistics costs by approximately 20%.	Multiple registrations for PAN-India businessesUnder the new regime, a business will have to register online for GST in every state involved in its sales process. If your business delivers goods across 5 states, then you’ll have to register for GST in those 5 states to carry out your business activities. Since the entire registration process takes place online, small business owners who are not used to working online might not find the transition easy.
4.	No Distinction between Goods and ServicesEarlier, businesses providing goods and services had to calculate VAT and Service Tax individually; GST has eased the process by eliminating the ambiguity between the two. This will help a lot in reducing tax evasions.	Returns must be filed on a monthly basisUnder GST, there will be around 36 returns in a fiscal year. GST returns will also require you to close your books on a monthly basis, which, will take a lot of time. Also, until you’ve filed the relevant returns, you cannot claim refunds and your customers cannot claim tax credit for the goods they bought from you. Should you miss a single return, you’ll be penalized Rs.100/- a day and your compliance rating on the GSTN portal will be reduced.

Benefits that GST gives to businesses

1. Input Tax Credit (ITC) – Previously ITC was only available for supplies linked to a taxable output. Under GST rules, businesses are allowed to claim ITC even on the tax paid for services complementing the business. Consequently, taxes paid on services such as advertising and marketing expenses can be claimed under a new GST feature termed as “Furtherance of business”.
2. Free Movement of Goods – The implementation of a single tax structure has been beneficial for product companies as they do not have to maintain warehouses in every state of operation or through which the goods pass. Previously, the manufacturer had to pay 2% of the value of goods at every state border, in addition to paying a 1% octroi at the state of consumption of the goods. This caused huge working capital requirements as well as loss of days due to long queues at each state border.

With GST, companies can maintain one huge warehouse in order to cater to multiple states in a region.

3. Implementation of the E-Way Bill – The e-way bill system was implemented after much delay a year after the implementation of the GST Act. It has made the movement of goods for businesses hassle-free. An E-way bill is to be generated for all movement of inter-state and intra-state goods and provides several benefits like:

1. Efficient Transportation

A truck in India covers a distance of 85,000 kilometres annually as against 150,000 to 250,000 kilometres in developed countries. The implementation of the E-way bill is expected to bridge this gap.

2. User-friendly Portal

The e-way bill portal is extremely simple to use and all dealers/transporters can generate them without any hassle.

While the e-way bill is touted to be the game-changer in the transportation sector, several states have stated their preference for introducing state-specific e-way bills. Such a development will hugely diminish the benefits derived from the system.

4. Provide an Impetus to Economic Growth – In the Annual CFO Survey conducted by Deloitte recently, 77 percent of the respondents believed that GST has had a positive effect on businesses. 58 percent of CFOs feel that the ‘ease of doing business’ parameter has improved and 57 percent of respondents are willing to take greater risks during the next few years.

5. Reduction in Cascading of Taxes – The cascading of taxes will be avoided by GST as the whole supply chain will get an all-inclusive input tax credit mechanism. This will reduce the overall tax cost built into various stages of manufacturing and reduce the cost for business and customers. 
6. Helping government revenue find buoyancy – Since GST will eliminate cascading of taxes, will it reduce the tax collections for the government? In fact, the ease of doing business with common procedures and online registration is expected to improve the tax buoyancy by expanding the tax base whilst enhancing taxpayer compliance. It will also increase interstate movement of goods and bring more unorganised industries under tax net thereby helping tax collection.

Penalties on non-filing of GST Returns

Interest is 18% per annum. It has to be calculated by the taxpayer on the amount of outstanding tax to be paid. It shall be calculated on the net tax liability identified in the ledger at the time of payment. The time period will be from the next day of filing due date till the actual date of payment.

As per the CGST Act, the late fee is Rs.100 per day per Act. So it is Rs.100 under CGST & Rs.100 under SGST. The total shall be Rs.200/day. However, there is a maximum levy of Rs. 5,000. There is no late fee separately prescribed under the IGST Act. Also, for GSTR-1 and GSTR-3B, the total late fee was reduced to Rs. 50 /day (Rs.20 /day for Nil filing)

Action Points

Here are the fundamental industry takeaways for the new GST.

• Equip your departments to understand the finer points of the GST and its overall framework
• Understand how the new tax rates and its processes will affect companies
• Begin restructuring the company to accommodate the associated changes from the tax
• Measure the impact of the tax on the financial aspect of your business
• Re-conceptualize pricing strategies in accordance to the tax
• Bring companywide departments in-line with the new IT requirements

Overall, the impact of GST will be transformational as it will affect every aspect of business, including the supply chain, technology infrastructure, financial reporting, tax accounting, and more.