It is said that ‘a business drives tax, and not the other way round’. But in Indian context, indirect taxes play an important role in driving businesses by restructuring supply chain and system according to multiplicity of costs and taxes. India is moving to a new indirect tax structure, GST, which is the biggest tax reform in the country since independence.
This article will throw light on how GST will change the way India does business.
Changes in business operation
The dual Central Goods and Service Tax (CGST) model in India includes inter-state supply (IGST) and intra-sate supply (SGST). The present indirect tax policy is origin or production based; but with GST, it will be consumption or destination based. This vast transformation will change business operation to a large extent.
Change in distribution model
Presently, most of the industries have state warehouses to optimize tax cost and assure easy stock transfer as 2% non-creditable tax is levied in any interstate sale. However, with GST’s launch, it will be a creditable tax. Therefore, many industries are planning to have a centralized warehouse system, which will change the current distribution model.
Place of supply rules
The ‘appropriate state’ for GST’s payment on supply will be controlled by ‘Place of Supply Rules’. Service providers will get effected from this rule the most. Industries discharging tax dues on the basis of a centralized platform need to have a state-wise establishment and registration. Because, place of supply depends on the location of service recipients especially for B2C supplies.
Change in cash flow cycles
Presently, India has various taxable events including sale for VAT/CST, excise for manufacturing companies, invoicing for services, etc. However, under GST, these taxable events will be determined as per ‘Time of Supply Rules for Goods and Services’. This may have a great impact on the industries and they may have to reconsider their present cash flow cycles for crucial effect on working out their capital management.
More taxable transactions
Currently, Indian economy has some trade practices to minimize tax leakage like transit sales, high sea sale, sale in course of import, etc. The main intention behind this practice is to minimize non-creditable VAT/CST costs in supply chain. But, the new GST will make these areas taxable with creditable facility to the buyers. The industries operating under this structure may need to go through some changes.
Reconsidering area of business
Under the present tax structure, regions like Jammu & Kashmir, Himachal Pradesh and few North Eastern States enjoy excise duty incentives from the central government. Similarly, these states also offer various incentive packages to endorse industrial growth. There is no guarantee of such incentive under GST and it may affect the concentration of industries in such states. It also may lead industries to reevaluate their area of operations.
GST will influence all areas of business operations starting from supply chain to location. Therefore, it is important for Indian industries to make themselves ready to accept this new tax structure with structured policies and planned operations.