How to get GST-ready in 40 days

For companies who are already paying indirect taxes, it would be critical to decide on prices

The two-day goods and services tax (GST) meeting in Srinagar on rates has come out with a number of surprises. While for goods, the rate category of 5 per cent, 12 per cent, 18 per cent and 28 per cent was always in the reckoning, the apprehension that the 28 per cent category would not be restricted to category of sin goods but would also extend to other goods like tyres, chocolates, etc has come true. What has come as a bigger surprise though is the four-tier rate structure being extended to services! Thus, services would also attract rates of 5, 12, 18 and 28 per cent, with the standard rates being 12 per cent/18 per cent. Thus, certain services will now also be taxed at 28 per cent e.g. hotels above Rs 5,000 tariff, considering that luxury tax is also getting subsumed and thus the effective tax rate would remain unchanged.

A lot needs to be achieved from today till July 1. Though it will be an uphill task, they need to take immediate steps to put in place automated compliance systems which will ensure filing of tax returns on time. Without appropriate filings, they risk losing customers who may be unable to take input credits due to non-compliances.

For companies who are already paying indirect taxes today, it would be critical to decide on the prices to be charged from July 1. This is unlikely to be a simple exercise. This would require an understanding of how the cost structure will change because of GST, which itself is dependent upon multiple factors such as reduction of price by vendors as a result of benefit accruing under GST, availability of additional credits, increase in rates on procurements, increase in working capital requirements, etc. With GST rationalising/reducing cascading effect of tax, there has been increased traction among the buyers and sellers to pass-on the benefit of reduction in tax. Now, with announcement of rates, these discussions would further gather momentum. 

A key aspect that needs to be kept in mind while deciding the prices is the anti-profiteering provision under the GST law. This mandates that any benefit arising out of rate reduction or additional credits needs to be passed on. Customers are likely to use this as a tool to seek price reduction. Non-availability of any standard guidelines as to how to calculate the net benefit is likely to add to the woes of the industry. 

Companies could also see rise in commercial litigation where long-term contracts are unclear about the change in taxes due to change in law or where the supplies have become commercially unviable at the amended GST inclusive price leading to premature termination. It is imperative to have immediate dialogue with vendors/customers and revisit the cost structure. 

Another key aftermath of the rate announcement is an immediate slowdown in volumes, where the post GST impact is likely to be positive. There would be tendency to postpone the purchases where the effective tax rates have been reduced. This also avoids the hassle of complying with the provisions related to transitional provisions. On the flip side, some businesses may see increased volumes, where the GST rate is increasing as the customers would tend to procure at current lower rate of tax. 

Businesses should also start planning for these contingencies, depending upon their product rates and possible impact on working capital. Also, there could be blockage of credits in initial months due to non-compliances by vendors, leading to cash outflows for tax payment.  Lastly, there would be a herculean effort needed to get the IT system ready. The product SKU’s whether on supply or procurement side would be required to be updated with the HSN and the applicable product rates. Due to four-tier rate structure viz. 5 per cent, 12 per cent, 18 per cent and 28 per cent, disputes on classification may only increase.

There had been wide expectations of delay in roll out by couple of months. Given that the government has displayed firmness in sticking to the original deadline, the luxury of additional months is not available. Thus, there would be a rush to get businesses ready before the deadline. Clearly, GST is going to occupy the centrestage of board meetings in the foreseeable future.

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The writer is CEO of Dhruva Advisors