The Goods and Services Tax (GST) was originally to be implemented in 2010. Until 2009, no one took much notice, even though everyone agrees that the implementation of GST is an extremely momentous and far reaching tax reform. Then, in 2009, everyone – the media, industry and consultants of every stripe – got extremely excited about this reform that was just a few months away, at the time. However, GST was not implemented in 2010, or in the next two years.
The pendulum seems to have swung the other way now. No one says much about GST and possibly with justification. There is naturally a sense of fatigue after three false alarms. Possibly GST has been shelved for now, with the Government having only two years left in its current term. However, at some point in the future, possibly after the general elections, one can imagine that we will be back in the ’09 mode, with everyone gearing up for GST once more.
In the midst of this uncertainty is the CFO. He has to wade through the hype and take sensible decisions on when to commit his company to making changes that are required to handle the demands and opportunities posed by the new regime. Given the many false alarms, what should the CFO do, when the hype starts once more. Is there any clarity on when it is likely to be implemented?
To try and provide some answers, one has to first understand what happened in the past three years. Why is it that despite the finance minister repeatedly asserting that GST would be implemented on April 1, 2010 (and then equally confidently announcing dates of 2011 and 2012), nothing has happened?
The answer seems to lie in the fact that the Constitution of India has to be amended to provide a legal basis for the new law. Therefore, no matter what the finance minister says, or for that matter, any other person says, GST implementation cannot progress beyond the drawing board until the Constitution has been amended.
It appears that while efforts to amend the Constitution have been shelved for now, there is a tremendous amount of work that is ongoing to prepare the information technology systems and the draft law. Therefore, as and when a political consensus emerges, the Government would be prepared to implement GST.
So sometime in the future, possibly after the next general elections, talk of GST would start again. At some stage, the Constitution would be amended. At that stage, industry would naturally drop its scepticism, and believe that GST is going to become a reality. Let’s say, for purposes of argument, the Constitution is amended in 2015. The question is, does a CFO believe that GST will become a reality in April 2016. Or does he wait for some time. If he waits, what does he wait for? If he takes the announcement at face value, what if it gets delayed? Is there any downside in “jumping the gun” and being prepared before time?
GST implementation requires not only amending the Constitution, but also enactment of a state GST law by each of the states in India. Therefore, even after the Constitution has been amended, the enactment of a law by a number of states is likely to be a process that would take a minimum of two years.
Based on the example given above, we are talking about 2017 being the earliest date of implementation of GST. Closer to date, around the time frame of 2016, a CFO would undoubtedly have a number of complex issues to analyse and a number of important decisions to take.
However, a CFO that takes the assertions of implementation of GST by 2016 at face value would risk repeating the experience of 2009. The key drawback of an early implementation of a company’s response to GST would be that a company would have to undo whatever it has done if GST does not get implemented on the expected date.
To take one example, relevant to the FMCG industry: it seems likely that GST will do away with Central Sales Tax (CST). This will in turn eliminate the need for warehouses in every state, in order to make stock transfers and avoid CST.
If a CFO were to authorise the rationalisation of his company’s warehouses in anticipation of GST being implemented and finds that he has acted too soon, he would have an extremely tax inefficient distribution structure in view of the unchanged VAT environment. This is obviously not a desirable state of affairs.
Therefore, one would be well advised to wait for the Constitution to get amended, and several states to enact the law before one acts on any of the aspects of preparing one’s company to deal with GST.
(Supported by Tajinder Singh) The author is Leader - Indirect Tax Practice, PwC India Email: firstname.lastname@example.org
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