GST jitters for corporate India

Lack of visibility on rates and the political logjam make companies apprehensive

Recently, an Israel-based company approached a consultancy firm to come out with a tax-efficient rollout plan for a proposed manufacturing plant in India with an estimated investment of around Rs 100 crore. The company was advised by its tax planners to hold on to its investment till the time the country rolls out the Goods and Service Tax (GDP) regime. "The company would have saved Rs 10-15 crore through input tax credits under the GST regime," said a tax consultant, who advised the firm, on condition of anonymity. The Israeli company decided to go by the advice of its tax experts, and go slow on its investment plans.

Similarly, many companies in corporate India are getting jittery about increased working capital requirement, as they go about their initial assessment of the impact of GST regime on their businesses and finding it difficult to get a hang on their price and supply chain issues without complete visibility on tax rates and its coverage across the basket of goods. The political logjam in Parliament around the Constitution Amendment Bill is adding to their apprehension. Many feel that the government should give industry six months to be GST-ready from the time that the law is in place with clear visibility over rates and coverage.

Under the dual-GST structure, there will be two GST rates - one by the Centre (central GST), and the other by the state (state GST). GST experts going by the recent global trends point out that the government is likely to keep a few goods and services outside the purview of GST - especially those that impact economically weaker sections of the society. So for all practical purpose, there could also be another category of goods and services that enjoy tax exemption by the Centre, but are taxed by the states. Similarly, states could also give tax concession to specific goods and services. GST experts expect the government to come out with a band of GST rates, prescribing a floor rate and an upper rate. "The multiplicity of rates, with different baskets of goods and services that will be taxed or are exempt, adds to the complexity of arriving at an impact on price and the supply chain," says Pritam Mahure, a Pune-based chartered accountant, who has been training many companies to be GST-ready. The lack of visibility on GST rates, including the floor rates, adds to the complexity.

Most multinational companies working out of India have some added issues to tackle. A senior executive from a global telecom equipment manufacturer said: "We finalise our departmental budgets for 2017 by October this year. If we do not have visibility on the GST law by then the challenge would be to factor in changes in budgets that need approval from headquarters." Another executive from an MNC, who heads the supply chain division, feel that they would need six months to implement the changes across their country-wide network once all the variables around GST have fallen in place.

Tax credit is something that is bugging many companies. A senior executive from an auto company, which has been in the assembly of components, and is now setting up a manufacturing unit, says there is a question mark over Rs 30 crore of existing tax credit that is due to them. "If we don't get our dues this will affect our investment decision," says the executive. Tax credit is fundamental to the success of any GST regime, and early clarity over the issue will assuage the fears of many corporates in their preparation for GST, point out consultants.

"Our biggest concern is that working capital requirement will go up substantially," says an official from an automobile manufacturing company with a pan-India presence. Similar is the case for service providers, traders and importers. An executive from a logistics company feels that logistics costs will grow substantially. "We expect some backward and forward integration to take place in our industry," adds the executive from the logistics firm. Logistics experts feel most companies would need to revisit warehousing strategy following GST rollout. "A central warehouse with a hub-and-spoke model would make more sense, instead of having a warehouse facility in each market state," says a logistics expert. Already some logistics companies have picked up land parcels in Nagpur and parts of Madhya Pradesh to set up large-scale warehousing infrastructure to support the emerging demand.

Some companies wonder whether state governments could curtail rights to claim some tax credits at a later date. "This point needs to be clarified" says a tax head of a manufacturing company.

Though there is no mention of any anti-profiteering laws to curb price hikes following rollout of GST, many tax experts feel going by the recent experience in Malaysia - which introduced GST in April this year - the government should be ready with such an eventuality.

Tax experts point out that GST should ideally be introduced at the start of the financial year, that is April 1 , such as Singapore (April 1, 1994) and Malaysia. There are instances of other countries which have rolled out the tax in the middle of the financial year - such as Australia (July 1, 2000), New Zealand (October 1, 1986) or Switzerland (January 1, 1995). If India's law makers and businesses get their act in place even by October 1, 2016, that may not look too bad.

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• Political logjam in Parliament
   
• The long road ahead to getting state assemblies to ratify a Constitution Amendment Bill, tabling and enactment of the GST law once drafting is complete
   
• Lack of clarity on which goods and services are subject to, or exempt from GST
   
• No visibility of the GST rates, including the floor rates
   
• No agreement among states on the threshold limit of GST
   
• How companies will carry forward available tax credit to GST tax regime during transition
   
• Apprehension around increased working capital requirements
   
• Difficulty in assessing impact on price and the supply chain