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IMPACT OF GST ON IMPORT & EXPORT OF GOODS

liveIntroduction of One Tax for One Nationdid serve to be an equivocation to the exporters. Export is the most important business activity of any country. Now whether the GST System ease out the process of export or further complicates it, is the matter of concern.

Export

“Export “means when goods or services are sent from our country to another country against monetary consideration and realisation of foreign exchange earnings. As per section 2 (18) of Customs Act, 1962. “Export “means taking goods out of India to a place outside India. Increase in exports results in higher economic growth as it induces the purchasing power of the nation in the global market.

Export of Goods

A good is a tangible product which is visible and can be held

The export of goods has been defined under sub-section (5) of Section 2 of IGST Act, 2017 as “Export of goods” means taking goods out of India to a place outside India.

Example: If I produce 100 tea cups and sell it to a company in Budapest, then I am exporting these 100 cups.

Export of Services

A service is an intangible element which is not visible and cannot be held but only experienced.

The export of services has been defined under sub-section (6) of Section 2 of IGST Act, 2017 as “Export of services “mean the supply of any service when

1. The supplier of service is located in India

2. The recipient of service is located outside India

3. The place of supply of service is outside India

4. The payment for such service has been received by the supplier of service in convertible foreign exchange

5. The supplier of service and the recipient of service are not merely establishments of a distinct person by Explanation 1 in Section 8 of IGST Act, 2017.

Procedure of Export

In case of the supply of goods that are prescribed under bond or Letter of Undertaking for the safeguard of the payment of integrated tax, refund of unutilized input tax credit will be made. In this case, the exporter can file a refund application on the GST portal.

If the exports have been made without furnishing of Bond / Letter of Undertaking (i.e. with the payment of tax), the exporter can claim the refund of taxes paid on export as well as the accumulated unutilized ITC relating to such exports

If the exporter is an agency of the United Nations or any embassy as specified in section 55 safeguards of GST may be prescribed. In that case, a refund can be claimed as specified under section 54 of the CGST Act. In this case, the shipping bill needs to be provided to claim the refund of the IGST

Impact Of GST On Exports

Positives

1. Simplification of tax structure and minimisation of compliance costs for small businesses

2. The input tax credit mechanism will reduce the cost of input and taxes paid by the exporters which will reduce costs for them. Input tax credit is the refund received of the amount of input tax paid while manufacturing a product.

3. Evolution of an alternative GST mechanism for exports to ensure that SME exporters don’t face liquidity or working capital pressures.

4. Lower cost of production increases the profit margin that the exporters receive, thus increasing the amount of currency entering into the Indian economy.

5. Reduction in compliance costs and complexity of the procedure gives a streamline flow in the process exports thereby ensuring a positive behaviour in the global market.

6. The basic customs duties are exempted under GST and exporters are not required to pay it.

Negatives

1. Non-availability of refund on time is increasing the working capital of the industries. Further increase in working capital increases the cost of production and thereby reducing the profit earned. Thus the amount entering the economy has been reduced.

2. Confusion in paperwork and compliance to the time limits have made it difficult for the labour oriented industries like garments, carpets, jewellery, pharmaceuticals etc. to manage their exports as the countries that they export have declined the trade over concerns for a hike in price.

The blocked working capital under GST affecting the cash liquidity of small businesses, the Council disbursed their refunds through cheques for July and August from October 10 and October 18 onwards respectively.

Conclusion

The implementation of GST has been proved to be a blessing in disguise for the exporters due to the refund and input tax credit facility. But somehow they have not been able to receive the refund at the appropriate time. If these small hiccups are treated over time, it is going to be creating an upward graph of the Indian economy.

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GST VS VAT

GSTand VAT are both counter approach taxation system by the government to the held valuation of goods and services across the nation. Talking about the older tax system, i.e. value added tax it was the earlier method of applying taxes on the general public while the goods and services tax is held to change this course of action towards the consumers.

There are a number of differences between GST and VAT:

1. Tax Based System

The value-added tax is also a summary based tax in which the taxpayers were held to submit their tax return on a certain period of time with a summary of sales and purchase. While in the Goods and service is a transaction based tax system which will need to submit sales transactions everything on time with complete and correct data.

2. Mode of Operation

The earlier VAT was an offline mode of taxation in which a person has to file a return on an actual file and has to submit in-person at income tax department nearby with an accountant attested statement. While the goods and services are totally based upon online medium and will take each and every returns and tax data online with matching concept.

Another aspect of quality reporting is the ability to be able to check how sales are doing at your store from anywhere anytime. That means if you’re away from your store you should be able to check net sales, transaction counts, average sales value, and the total number of customers, in real time directly from your phone or tablet.

3. Return to be Filed

Under GST, taxable person will be required to file the details of all the sales electronically by 10th day of every month in GSTR-1 succeeding the taxable month and simultaneously he has to file the details of all the purchases by 15th day of month in GSTR-2 succeeding the taxable month and he has to file the monthly return in GSTR-3 by 20th day of every month succeeding the taxable month. And annual return should be filed up to 31st December in GSTR- 8 of next financial year.

4. Input Tax Credit

After the introduction of GST Law, this cascading effect will be eliminated because in GST we can take Cenvat Credit of interstate sales Purchase as well as in GST we can take credit even after sales of Services. Thus the prices of Goods and services become low and ultimately the inflation rate become down and economic growth will increase.

While under VAT system tax credit for CST cannot be taken against VAT payable so it leads to cascading effect.

5. Cost Reduction

The introduction of GST law will ultimately result in cost reduction of goods as there will be a single tax levied that is goods and service tax.

While under VAT law a trader cannot utilize credit of other indirect taxes like service tax credit etc. for payment of VAT liability so it will result in an increase in the cost of goods.

6. Tax on Interstate Sales

Under GST law IGST will be levied in case of inter-state sale and purchases. While under VAT Law CST is levied on inter-state purchase and sales of goods.

7. Input Tax Credit Mismatch

Under GST law the biggest problem of ITC mismatch will get solved as all the details of sales will be filed till the 10th day of next month and all the details of purchases will be filed by 15th of next month and monthly return will be filed by 20th of next month. So as all the details will be timely filed and then the monthly return will be filed so all the details will be cross-tallied.

While under VAT system there is a very big issue of ITC mismatch as there is no such system for filing details of sales and purchase by some specified date before filing the VAT return which gives rise to Input tax credit mismatch.

Thus, there are a number of differences between GST and VAT. And GST will be a probable solution for different issues in VAT system.

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WILL GST TROUBLE ACCOUNTING AND FINANCIAL REPORTING

Print Friendly and PDF GST transition is not only about a tax change but a complete business, finance, accounting and reporting overhaul

Following are some key areas where companies will need to focus from financial accounting and reporting perspective on transition to GST

Presentation Of GST In Financial Statements

Currently, accounting treatment of various indirect taxes varies based on their nature and point of levy. Under IND AS, excise duty is included in revenue, since it is a production-based tax. Sales tax and VAT is not included in revenue, since it is levied at the time of sales. GST is a destination-based tax, which is levied at the point of supply. Hence, it is likely that revenue will not be presented including GST. This is likely to bring significant volatility in the reported revenue number of various companies even though from an economic perspective no significant change in operations has happened. Companies should consider a need for non- GAAP reporting to better explain their performance from a revenue perspective to all their stakeholders.

Impact Of Tax Credit

GST is likely to bring significant benefits to organizations by way of tax credit. Currently, organizations do not get tax credit for indirect taxes such as luxury tax, Octroi, Entry tax, CST. On transition to GST, majority of these levies are likely to subsume in GST and will be eligible for tax credit. It is a well-established accounting principle that refundable taxes are not considered as part of cost of acquisition of asset/expense and are accounted as an asset. Transition to GST will require companies to reconfigure their inventory valuation or asset capitalization or expense recording rules in their accounting system to ensure tax credits are accounted appropriately in the GST regime.

Reconciliations

Revenue recognition according to IND AS may not coincide with turnover number for the purpose of GST.

For example, in case of multiple element contracts, total consideration will be allocated to each component based on fair value of each element. However, the same methodology may not work for GST purpose. Moreover, GSTpayments and return filings are expected to be state wise. Accordingly companies will need to devise a proper system in place, for timely state-wise reconciliations of periodic GST filings in various states, with the amount recorded in the books of accounts. Companies, which include excise as a part of sales for their internal reporting/MIS, may have to redesign the MIS post-GST transition and consider the consequent impact, if any, on KPIs of sales/marketing staff.

Accounting Of Tax Holiday Incentives

Many companies enjoyed significant amount of tax holiday incentives and accounted for same as government grant. For example, the Expert Advisory Committee of the ICAI, while evaluating an issue relating to sales tax exemption under In AS, required such exemptions to be recorded as revenue grants (distinct from sales). It is not clear whether these incentives will continue even in the GST regime. Companies will need to assess accounting implications of any change in these tax holiday benefits upon finalization of GST laws.

Updation Of Chart Of Accounts

Companies will need to plan well for transition and assess carefully the transition rules. A key aspect will be whether transition results in any potential write off of tax credits accumulated in particular states and not likely to be set off. Another practical challenge relates to carry forward of tax credits. These may need to be carried forward state wise, which could involve significant effort in identifying and breaking down the current balances. Further tax accounting and compliance considerations needs to be planned in the IT systems for transactions originating before transition but reversing/concluding post transition, e.g., sales returns, receipt of purchases after transition etc.

Transition

Another key impact area will be the Chart of Accounts used for reporting. Currently, there are several indirect taxes and hence, there are usually many tax-related general ledger (GL) codes in the Chart of Accounts used for financial reporting. In a GST regime, the new COA will depend on the type of business, credit availment rules and place of supply etc. However, creating the new Chart of Accounts would require careful consideration and planning; else, this could impact financial reporting. Essentially management will need to make substantial accounting-related modifications in their IT systems at a transaction level, for all transactions affecting tax GLs, including to the auto accounting entries generated in ERPs. This will entail a detailed assessment to ensure there are no financial reporting errors and impact on internal controls post transition.

Conclusion

India is already handling with transition to IND AS and need to address various aspects of financial reporting systems and processes to move toward sustainable IND AS reporting. Transition to GST is also likely to impact many of these financial reporting systems as well. It is critical that organizations chalk out their mitigation plan to address changes arising out of both these regulations in a synergistic manner to reduce cost of transition and minimize business troubles.

To understand how our GST Compliance Solution will help you achieve the perfect GST Compliance Rating, Contact us.

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PETROL UNDER GST?

Ever since the rollout of GST on July 1, 2017, there have been talks about bringing petroleum products under the new tax net. With oil prices spiralling globally in the past few months, the talks have turned more serious with a few people who matter indicating that petroleum would also be a part of GST.

The time is not propitious Ever since the rollout of GST on July 1, 2017, there have been talks about bringing petroleum products under the new tax net. With oil prices spiralling globally in the past few months, the talks have turned more serious with a few people who matter indicating that petroleum would also be a part of GST.

There is a view that GST would reduce the prices of petroleum products in the country and can act as an effective hedging tool to the price shenanigans of OPEC (Organisation of Petroleum Exporting Countries)

The CGST Act already has a provision in place; Section 9(2) of the Act states that “the central tax on the supply of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel shall be levied with effect from such date as may be notified by the Government on the recommendations of the Council.”

Will Prices Drop?

The best answer to the question whether GST would really reduce the prices of petrol and diesel is: “It depends”. It would depend on a number of factors, such as: the rate of GST; whether the Centre is prepared for a further slippage in fiscal deficit; whether State governments would levy a local tax over and above GST; and whether the GST Council would recommend a cess over and above the peak GST rate of 28 per cent.

In the present structure, Central excise duty and VAT constitute a significant amount to the final price of petroleum products — in States such a Karnataka, the VAT on petroleum products is 30 per cent. State governments would demand compensation for loss of revenue on introduction of GST.

The GST Council also appears to be taking it a bit easy now — the earlier buzz around their monthly meetings has slowly faded. Levying a petroleum cess just to bring parity between the current rates and those under GST would also not serve any purpose — prices are not going to reduce since tax rates are almost the same and input tax credit cannot be claimed.

Permitting State governments to levy a local tax over and above GST is also a no-brainer — it would only create a further disparity in prices of petroleum products between States. In the present structure of taxation, a person driving from Bengaluru to Chennai will prefer to tank up petrol in Karnataka as it is cheaper by almost ₹3 to a litre. The very fact that such a differential exists vitiates the equity canon of taxation postulated by Adam Smith.

GST followers report that the tax may first be introduced on natural gas and aviation turbine fuel (ATF) — products that are not as sensitive to prices as diesel. Even before thinking of doing this, the Finance Ministry should have data on the impact the introduction of GST (without any cess) would have on the fiscal deficit and compensation outflow.

If the benefit to the consumers is minimal, the Council should seriously reconsider its decision of bringing petroleum products under GST. It has many other useful things to do, such as streamlining some of the existing onerous provisions. The timing is just not right for a “ Petroleum GST”.

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HOW ACCOUNTING HAS CHANGED OVER THE TIME

The basics of accounting – identifying revenue and calculating expenses – remain unchanged. Accounting principles generally are the same whether you are seated before an abacus or in front of a laptop. However, changes to accounting regulations, methods and the accountants themselves occur. In contrast to the accounting industry's relative stability historically, the last 10 years have brought changes to accounting terms of the technology, the workforce and the level of scrutiny.

Technological advances have affected most industries, and the accounting industry is no exception. New technologies spawn new applications and possibilities, which in turn inspire changes to accounting methods and methodologies. 

The advent of cloud-enabled computing has brought improvements to mobility and connectivity for accountants. As a result, you are able to work with clients across the globe from the comfort of your home, remotely access your data from a variety of devices regardless of your location or the time, perform advanced computations on the fly and retrieve real-time analytics.

Technological changes to accounting have automated many of the inputs and calculations that accountants once had to perform manually. This allows you to play a more analytical and consultative role in your interactions with your clients. Of course, these advances also require you remain flexible, adaptable and perpetually learning in order to keep up with the rapid pace.

Regulations and rules are certainly nothing new to the field of accounting in general. However, the past 10 years have witnessed several devastating financial scandals that resulted in heightened scrutiny and ushered in several changes to accounting laws. Massive federal legislation was passed, such as the Sarbanes-Oxley Act, the Dodd-Frank Act and the Affordable Care Acts, along with a proliferation of state and local taxes and regulations. Designed in part as a means of improving the transparency of financial transactions, this heightened level of scrutiny and regulatory oversight brings changes to accounting that require you to keep current with ever-shifting legal and political expectations and demands.

The past decade brought significant changes to accounting and to the world in general, engendered by shifts in technology, diversity and transparency of the industry and surrounding societies. Expect the evolution of accounting to continue on into the next 10 years as well.

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IMPACT OF GST ON IT SECTOR

The long-awaited GST bill that is expected to unify and simplify the Indian tax structure, will be implemented from 1st April, 2017 and most industries are likely to fall under the blanket of its impact. However, the IT sector with services such as software development, mobile app development, website design and more, is one of the major sectors that is likely to be impacted. With the intention of safeguarding the financial independence of the States and the Centre, the government has proposed a dual GST structure, under which State GST as well as Central GST will be applicable for every supply of good. Though at an elementary level this might appear to be basic, the IT sector may have some formidable changes that need to be tuned in to

We have compiled a list of the five ways GST implementation will impact the IT sector:

Tax Rate

The prevailing service tax rate on IT services is 15%. However, the recommended revenue neutral rate is at 15–15.5% and the standard rate is expected to be around 17–18%. Therefore, the cost of IT services will elevate, especially for end customers who do not usually claim the tax input credit. Under our current tax structure, the sale of packaged software is entitled to both VAT (approximately 5%) and service tax (15%). The VAT on sales is directed to the state government whereas the service tax on service follows the central government. There are also cases where along with the VAT and service tax, excise duty is also applied due to lack of clarity from the government. However, it is expected that once the GST is implemented, the current average tax rate of around 25–35% shall come down to around 18–25%.

Cascading Effect of Taxes

The cascading effect of taxes will be effectively addressed under the GST regime. Traders, under GST, will be eligible to avail the credit of services such as in the case of AMC (Annual Maintenance Service) contracts. Currently, IT service providers can’t claim credits of quality including the assessment or deal charge spent on setting the IT infrastructure. Also, services charged by an IT service provider to a client who is a broker is an expense incurred for the IT service provider. Under GST, both the IT service providers and their clients will be eligible to claim full credit of GST. This is expected to eliminate the cascading effects of the present tax structure.

Business Process Change

Under GST, which is a destination-based tax, tax is collected by the state where the goods or services will be consumed. Most IT companies are registered only with the Central Service Tax authorities and usually all billing and accounting tasks are carried out from a central location. Under the GST regime, service providers are required to obtain registration for all the states that they are catering to, i.e. all states that they have customers in. This is to be done so that the SGST (State Goods and Service Tax) component of IGST (Integrated Goods and Services Tax) is rendered for respective states. IT service providers will therefore have to bifurcate their services and bill their customers based on location of consumption.

eCommerce Sphere

For eCommerce traders, the GST is expected to increase administrative costs. Also, since e-tailers have hundreds of sellers on their platforms, it significantly increases compliance burden. Small sellers will face cash-flow issues and will claim for refunds on the tax paid on inputs, which the eCommerce platform may not support. The tax collection at source (TCS) guideline under GST will increase the administration and documentation workload for eCommerce firms.

Compliance

The model GST law recognizes at least 111 points of taxation which means IT companies providing services all over India will have to seek registration in as many as 37 jurisdictions that will include 29 states, seven union territories and the Centre. This means that IT companies will have to register and file compliance reports at as many as 111 points.

The Way Ahead…..

Even though new provisions under the GST structure such as time-bound processes and clarity on electronic download classifications will ease the process of conducting business for IT companies, there still remain several concerns, especially tax exemptions, which need addressing. The government should ensure the GST legislation addresses the aforementioned challenges so that the reform turns into a success for the IT sector. Deskera ERP, being India’s first GST ready software, takes into account all applicable taxes that fall under the blanket of the Indian GST and can be readily plugged in to accommodate any upcoming tax requirements.

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WILL GST TROUBLE ACCOUNTING AND FINANCIAL REPORTING

Print Friendly and PDF GST transition is not only about a tax change but a complete business, finance, accounting and reporting overhaul

Following are some key areas where companies will need to focus from financial accounting and reporting perspective on transition to GST

Presentation Of GST In Financial Statements

Currently, accounting treatment of various indirect taxes varies based on their nature and point of levy. Under IND AS, excise duty is included in revenue, since it is a production-based tax. Sales tax and VAT is not included in revenue, since it is levied at the time of sales. GST is a destination-based tax, which is levied at the point of supply. Hence, it is likely that revenue will not be presented including GST. This is likely to bring significant volatility in the reported revenue number of various companies even though from an economic perspective no significant change in operations has happened. Companies should consider a need for non- GAAP reporting to better explain their performance from a revenue perspective to all their stakeholders.

Impact Of Tax Credit

GST is likely to bring significant benefits to organizations by way of tax credit. Currently, organizations do not get tax credit for indirect taxes such as luxury tax, Octroi, Entry tax, CST. On transition to GST, majority of these levies are likely to subsume in GST and will be eligible for tax credit. It is a well-established accounting principle that refundable taxes are not considered as part of cost of acquisition of asset/expense and are accounted as an asset. Transition to GST will require companies to reconfigure their inventory valuation or asset capitalization or expense recording rules in their accounting system to ensure tax credits are accounted appropriately in the GST regime.

Reconciliations

Revenue recognition according to IND AS may not coincide with turnover number for the purpose of GST.

For example, in case of multiple element contracts, total consideration will be allocated to each component based on fair value of each element. However, the same methodology may not work for GST purpose. Moreover, GSTpayments and return filings are expected to be state wise. Accordingly companies will need to devise a proper system in place, for timely state-wise reconciliations of periodic GST filings in various states, with the amount recorded in the books of accounts. Companies, which include excise as a part of sales for their internal reporting/MIS, may have to redesign the MIS post-GST transition and consider the consequent impact, if any, on KPIs of sales/marketing staff.

Accounting Of Tax Holiday Incentives

Many companies enjoyed significant amount of tax holiday incentives and accounted for same as government grant. For example, the Expert Advisory Committee of the ICAI, while evaluating an issue relating to sales tax exemption under In AS, required such exemptions to be recorded as revenue grants (distinct from sales). It is not clear whether these incentives will continue even in the GST regime. Companies will need to assess accounting implications of any change in these tax holiday benefits upon finalization of GST laws.

Updation Of Chart Of Accounts

Companies will need to plan well for transition and assess carefully the transition rules. A key aspect will be whether transition results in any potential write off of tax credits accumulated in particular states and not likely to be set off. Another practical challenge relates to carry forward of tax credits. These may need to be carried forward state wise, which could involve significant effort in identifying and breaking down the current balances. Further tax accounting and compliance considerations needs to be planned in the IT systems for transactions originating before transition but reversing/concluding post transition, e.g., sales returns, receipt of purchases after transition etc.

Transition

Another key impact area will be the Chart of Accounts used for reporting. Currently, there are several indirect taxes and hence, there are usually many tax-related general ledger (GL) codes in the Chart of Accounts used for financial reporting. In a GST regime, the new COA will depend on the type of business, credit availment rules and place of supply etc. However, creating the new Chart of Accounts would require careful consideration and planning; else, this could impact financial reporting. Essentially management will need to make substantial accounting-related modifications in their IT systems at a transaction level, for all transactions affecting tax GLs, including to the auto accounting entries generated in ERPs. This will entail a detailed assessment to ensure there are no financial reporting errors and impact on internal controls post transition.

Conclusion

India is already handling with transition to IND AS and need to address various aspects of financial reporting systems and processes to move toward sustainable IND AS reporting. Transition to GST is also likely to impact many of these financial reporting systems as well. It is critical that organizations chalk out their mitigation plan to address changes arising out of both these regulations in a synergistic manner to reduce cost of transition and minimize business troubles.

To understand how our GST Compliance Solution will help you achieve the perfect GST Compliance Rating, Contact us.

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WILL GST TROUBLE ACCOUNTING AND FINANCIAL REPORTING

Print Friendly and PDF GST transition is not only about a tax change but a complete business, finance, accounting and reporting overhaul

Following are some key areas where companies will need to focus from financial accounting and reporting perspective on transition to GST

Presentation Of GST In Financial Statements

Currently, accounting treatment of various indirect taxes varies based on their nature and point of levy. Under IND AS, excise duty is included in revenue, since it is a production-based tax. Sales tax and VAT is not included in revenue, since it is levied at the time of sales. GST is a destination-based tax, which is levied at the point of supply. Hence, it is likely that revenue will not be presented including GST. 

his is likely to bring significant volatility in the reported revenue number of various companies even though from an economic perspective no significant change in operations has happened. Companies should consider a need for non- GAAP reporting to better explain their performance from a revenue perspective to all their stakeholders.

Impact Of Tax Credit

GST is likely to bring significant benefits to organizations by way of tax credit. Currently, organizations do not get tax credit for indirect taxes such as luxury tax, Octroi, Entry tax, CST. On transition to GST, majority of these levies are likely to subsume in GST and will be eligible for tax credit. It is a well-established accounting principle that refundable taxes are not considered as part of cost of acquisition of asset/expense and are accounted as an asset. Transition to GST will require companies to reconfigure their inventory valuation or asset capitalization or expense recording rules in their accounting system to ensure tax credits are accounted appropriately in the GST regime.

Reconciliations

Revenue recognition according to IND AS may not coincide with turnover number for the purpose of GST.

For example, in case of multiple element contracts, total consideration will be allocated to each component based on fair value of each element. However, the same methodology may not work for GST purpose. Moreover, GSTpayments and return filings are expected to be state wise. Accordingly companies will need to devise a proper system in place, for timely state-wise reconciliations of periodic GST filings in various states, with the amount recorded in the books of accounts. Companies, which include excise as a part of sales for their internal reporting/MIS, may have to redesign the MIS post-GST transition and consider the consequent impact, if any, on KPIs of sales/marketing staff.

Accounting Of Tax Holiday Incentives

Many companies enjoyed significant amount of tax holiday incentives and accounted for same as government grant. For example, the Expert Advisory Committee of the ICAI, while evaluating an issue relating to sales tax exemption under In AS, required such exemptions to be recorded as revenue grants (distinct from sales). It is not clear whether these incentives will continue even in the GST regime. Companies will need to assess accounting implications of any change in these tax holiday benefits upon finalization of GST laws.

Updation Of Chart Of Accounts

Companies will need to plan well for transition and assess carefully the transition rules. A key aspect will be whether transition results in any potential write off of tax credits accumulated in particular states and not likely to be set off. Another practical challenge relates to carry forward of tax credits. These may need to be carried forward state wise, which could involve significant effort in identifying and breaking down the current balances. Further tax accounting and compliance considerations needs to be planned in the IT systems for transactions originating before transition but reversing/concluding post transition, e.g., sales returns, receipt of purchases after transition etc.

Transition

Another key impact area will be the Chart of Accounts used for reporting. Currently, there are several indirect taxes and hence, there are usually many tax-related general ledger (GL) codes in the Chart of Accounts used for financial reporting. In a GST regime, the new COA will depend on the type of business, credit availment rules and place of supply etc. However, creating the new Chart of Accounts would require careful consideration and planning; else, this could impact financial reporting. Essentially management will need to make substantial accounting-related modifications in their IT systems at a transaction level, for all transactions affecting tax GLs, including to the auto accounting entries generated in ERPs. This will entail a detailed assessment to ensure there are no financial reporting errors and impact on internal controls post transition.

Conclusion

India is already handling with transition to IND AS and need to address various aspects of financial reporting systems and processes to move toward sustainable IND AS reporting. Transition to GST is also likely to impact many of these financial reporting systems as well. It is critical that organizations chalk out their mitigation plan to address changes arising out of both these regulations in a synergistic manner to reduce cost of transition and minimize business troubles.

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Important GST Definitions, Terms and Glossary

The GST is ready for implementation and brings with it a slew of changes that indirect tax payers and business owners need to get familiar with. Not only are businesses required to register themselves under the GSTN, they must also reassess their business in accordance with certain new terminologies to determine how the GST impacts them. A few of the important GST definitions and the registration process are briefly specified here to help you get started.

GST Terms To Know 

Certain essential definitions have been mentioned under the Model GST Law, which was first released in June, 2016, and then modified and released again in November, 2016.

Business : Definition: Business refers to trade, commerce, manufacture, profession, vocation or any other similar activity, including transactions related or incidental thereto, irrespective of volume or frequency, as well as supply of goods/ services in connection with commencement or closure of business.

The definition is quite wide and seems to be borrowed from State VAT legislation. Some parts have been modified to include transactions in services.

Place of Business : Definition: (a) A place from where the business is ordinarily carried on, and includes a warehouse, a godown or any other place where a taxable person stores his goods. (b) A place where a taxable person maintains his books of account. (c) A place where a taxable person is engaged in business through an agent.

Since GST is a destination-based indirect taxation system, the place of business is a critical factor in determining the business model and taxation dues of a business that is present in many places.

Time of Supply : Definition: The time of supply is the earlier of the following dates: (a) Date of issue of invoice by the supplier or the last day by which the supplier is required to issue invoice or (b) Date of receipt of payment.

The time of supply is important since it determines the point of taxation i.e. the point in time when goods / services have been deemed to be supplied or services have been deemed to be provided and hence SGST or IGST apply.

Goods : Definition: “Goods” refers to every kind of movable property other than money and securities, but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

While the term “movable property” has been mentioned, it has not been defined in the Model GST Law, and one needs to refer to the General Clauses Act 1897 for this. It does not include intangible property such as intellectual property rights (copyrights, trademarks). Also, an item needs to be movable for it to be classified as goods.

Services : Definition: “Services” means anything other than goods.

The GST Model Law clarifies that services include intangible property and actionable claims but does not include money. There are separate definitions for supply of software, works contracts and leasing transactions, even though they fall in the ambit of services. The inclusion of “actionable claim” may create confusion where financial and commercial transactions are involved.

Software includes the development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software, and is treated as a service.

As far as leasing transactions are concerned, a finance lease would be considered as supply of goods, and an operating lease would be considered as a service under the Model GST Law.

Works Contract : Definition: It is an agreement for carrying on building, construction, fabrication, erection, installation, fitting out, improvement, modification, repair, renovation or commissioning of any moveable or immovable property. Work Contract has been defined as a “Service”, simplifying its taxation procedure.

Supply : The GST has three new definitions related to “Supply”, i.e., Principal Supply, Composite Supply and Mixed Supply.

1. Principal Supply Definition: It is the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary and does not constitute, for the recipient an aim in itself, but a means for better enjoyment of the principal supply. It is generally the dominant supply in a bundle of supplies or a bundle of services. For example, in a mobile phone and the charger, the mobile phone will be the principal supply.

2. Composite Supply Definition: a supply made by a taxable person to a recipient comprising two or more supplies of goods or services, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

For example, goods packed with insurance and packing material is a composite supply, with the good being the principal supply. Here, there is a main supply and supporting supply, which normally go together in the course of business and enhance the enjoyment of the main supply.

3. Mixed Supply Definition: Two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.

Take the case of a corporate gift pack that consists of a tie, a wallet and a pen. These are bundled in a package supplied for a single price. None of the items is dependent on the other, nor necessary to be purchased together. This is a case of a mixed supply, where the individual items, which can also be sold separately, are sold together.

Aggregate Turnover : Definition: “aggregate turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess.

Reverse charge tax is a system where the recipient of the supply (goods and services), i.e. the client, is liable to pay the tax. Inward supplies are input supplies used as an input for manufacturing the goods or providing the service. Tax paid on input expenses can be adjusted against tax paid on output supplies, through input tax credit. This means that it cannot be treated as a part of the aggregate turnover.

Read more about GST at our GST blog for India.

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Impact Of GST On Manufacturing

GST — the unified tax system that is set to revolutionize indirect taxation in India— is finally here. Some of its key proposed advantages are streamlining of tax payments, reduction in tax frauds, and ease of doing business. Here is a look at how these will play out in the manufacturing domain.

Make In India & Manufacturing

The manufacturing sector in India contributes a mere 16% to the overall GDP. However, the potential to make this a high-growth and high-GDP sector is huge. The “Make in India” campaign by Prime Minister Narendra Modi makes this possibility real, by giving impetus to the sector. Furthermore, PwC estimates that India will become the fifth largest manufacturing country in the world by the end of 2020. It would be interesting to know how the Goods and Services Tax or GST impacts this roadmap.

Impact of GST on Manufacturing

GST is one of the key policy changes that will have a direct impact on manufacturing establishments. So far, the existing complex tax structure has been a dampener, resulting in the slow growth of the sector. GST is expected to liberate the sector by unifying tax regimes across states.

Overall, GST is expected to have a positive impact and boost manufacturing.  Here is why:

Removal Of Multiple Valuations Will Create     Simplification: The old tax regime     subjects manufactured goods to excise duty, which is calculated     differently in different states. While some states calculate excise duty     based on transaction value, others calculate it based on quantity. Most     manufactured goods’ excise duty is currently considered on MRP valuation.     This creates great confusion in valuation methods. GST will usher in an     era of transaction-based valuation, making calculation of tax much simpler     for the manufacturer.

Entry Tax Subsummation Will Reduce Cost Of Production: The subsuming of the entry tax for inter-state     transfers is a key reason for reducing cost of goods and services. For     example, a supplier of cement from Maharashtra to Karnataka was earlier     required to pay entry tax when the supply crossed the interstate border.     For Karnataka, the entry tax rate was 5% of the value of the goods. The     supplier would pass on this additional cost to the customer, resulting in     increase in selling price. With entry tax being subsumed, the supplier need     not pay the entry tax rate amount and consequently, not charge the     customer this amount either.

Improved Cash Flows: Under     the new tax laws, manufacturers can claim input tax credit on input goods,     which seems to be a positive sign for cash flow. SMEs are keenly observing     the time difference between input tax credit and the credit being     available.

Single Registration Process Will Provide Ease Of     Registration: The old regime required     manufacturers to register each manufacturing facility separately, even those     in the same state. GST will simplify the plant registration process by     allowing single registration for all manufacturing entities within the     same state. Previously, if a brick manufacturer had factories in     Bangalore, Hubli and Dharwad, each unit had to be registered separately.     Under GST, all of these factories would be jointly registered under the     state of Karnataka. Of course, different state-entities will require     separate registrations under GST too.

Removal Of Cascading Will Lead To Lower Cost-To-Consumer: The old tax regime does not allow manufacturers     to claim tax credit on inter-state transaction taxes such as octroi,     central sales tax, entry tax etc. This results in cascading of taxes—an     extra cost to the manufacturing company. Manufacturers end up passing on     these extra costs to the consumer. The unified GST regime will eliminate     multiple taxes and thus lower cost of production; this, in turn, will mean     lower pricing for the consumer. For example, prior to 1 July 2017, SMEs in     manufacturing used to pay Excise Duty, Central State Tax and sometimes VAT     too at 12.5%, 2% and 5.5% respectively. With GST in effect, they are     required to pay 18% in taxes.

Restructuring Of Supply Chain: To align with the GST law, businesses will be     required to realign their supply chains. However, this is a blessing in     disguise. Till date, most supply chain structuring has been designed     around how to manage tax regimes. With a single tax regime, this will     change, and supply chain structures will focus on driving business     efficiencies. An example is that of warehousing. The old regime demands     that warehouse management be based on arbitrage between varying VAT rates     across states. This is expected to change to bring in economic     efficiencies and more customer-centricity going ahead.

 Manufacturers, however, are concerned about the following aspects:

Increase In Immediate Working Capital Requirements: Branch transfers and depo transfers will be     treated as taxable under GST; IGST will be applicable on these transfers.     This increases the requirement for immediate working capital. Another     reason for increased working capital requirements is that the receipt of     advance is taxable as per GST rules. Also, stock transfers are treated as     “supply” and hence are taxable under the GST regime.

More Stringent And Elaborate Transaction     Management: GST     aims to achieve better tax compliance. To make this possible,     manufacturers must work towards streamlining existing transactions; this     means additional resources and costs. For example, under GST, credit in     respect to an invoice can be taken only up to one year of the invoice     date. Also, the provision of reverse charge means that the liability to     pay tax falls on the recipient of goods/services instead of the supplier.     The payment of reverse charge is dependent on the time of supply (30 days     from the date of issue of invoice by the supplier in case of goods and 60     days for services).These changes will require manufacturers to carefully     assess and track their supply processes, especially the timelines. This     may mean hiring a better skilled compliance workforce, and better systems     and software. More legal considerations will also mean more costs.

Lack Of Clarity On Local Exemptions: Despite GST being proposed as a unifying platform     for indirect tax, all the components for manufacturing are not yet clear.     One such area is localized area-based exemptions. The old structure     provides certain exemptions for certain goods in specific states (for     example the North East or hilly states). Under GST, most of these     exemptions are likely to be removed, resulting in a negative cost-impact     on these manufacturers. Such companies must reassess their financial     position in view of such likely changes.

Overall, one can say that the impact of GST on the manufacturing sector is positive. It provides a unique opportunity to streamline business operations to become more compliance and profitability-oriented, rather than tax-oriented. It puts power in the hands of business leaders to bring about positive change and steer their enterprises on a growth path, powered by GST-compliance.

Read more of our content on GST by clicking here.

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Impact Of GST on E commerce

Online business (E-Commerce) is the most preferred way of doing business and reach every segment (Age, Price, Location, Gender, Products & Services, etc). Online business (E-Commerce) works in a different way than other conventional businesses in India. Currently, with foreign investment pumping huge money in online business; their unique operations model has been challenging to government on understanding and applying taxes to online businesses. This demand for GST to be upgrade in Indian market and be in par with other 140 countries.

GST would impact industry sectors, product manufacturers and distributors due to its broad-based consumption tax in several ways. Maximum Online business (E-commerce) companies have invested money on tax experts to deal with the problem and have finding solutions for easy GST implementation.

On a brief, the 5 important GST impact on ecommerce:

Migration to New Regime:

With the introduction of the new tax regime, an important factor is migrating and adapting quickly to the new policies. Hence, even for an eCommerce it will be important to have an easy migration with their existing ERP system or a new system. The operations of ecommerce are spread Pan – India, hence, it becomes more important for the company to have a system strong enough which will help them calculate the huge interstate and intra state transactions along with GST for the goods.

Place of Supply Rules: With GST in India being implemented in April, 2016, the Revenue Department is planning to implement ‘Place of Supply’ Rules which will be applicable based on destination and levied on the point of delivery. Since ecommerce has a Pan – India geography, this will help in locating the supply and whether the supply is inter or intra state which is very important for GST calculation since it will be a single tax regime for Centre and state.

 GST Taxation Reports: For bigger and popular ecommerce sites like Amazon, Flipkart, Snapdeal, etc. there is are a lot of issues faced with respect to logistics and warehousing since they have more than 100 sellers on their platform that come together to sell their products using the ecommerce platform. Over here, periodic and regular reporting is required for taxation and record purposes.  

 Effective Supply Chain Management: With GST in place, the eCommerce businesses are set to reap the maximum benefits. With a complex and multi-tier supply chain system, there are a lot of paperwork, reporting and compliances also involved. GST will benefit these ecommerce by removing the complexities that the multi-tier supply system along with lesser paperwork and lesser compliances. Being a single tax regime, being applicable in Centre as well as State, there will be transparency and ease in transport of goods, esp. for ecommerce business who sell goods across many states.

 Higher Costs: On a flip side of GST Impact on ecommerce, the costs for the ecommerce industry will likely rise with GST due to the high costs involved in storing and warehousing of the goods. Even if the goods are not sold, the company will be needed to pay the tax and can only reclaim it once the good has been sold. This will likely increase the working capital of the ecommerce firm and may end up paying GST tax higher than the excise which is currently levied on them.

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Determining the GST Tax Structure

Determining the GST Tax Structure

The GST tax structure will bring about a drastic change in the current indirect tax system. Currently, tax barriers have created a fragmented Indian market. This has resulted in a cascading effect of taxes on cost making indigenous manufacture less profitable. Also, the complex multiple taxes have raised the cost of compliance considerably.

The GST tax structure will comprise of the Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST) and Integrated Goods and Service Tax (IGST). The four slab tiers of the GST tax structure will be 5 per cent, 12 per cent, 18 per cent and 28 per cent. The  lowest rates will be applicable for essential items and the highest for luxury and demerit goods. Moreover, these include SUVs, luxury cars and tobacco products. GST may go up to 40 per cent after the GST Council proposed raising the peak rate.

Service tax will increase from its current levels of 14.5 per cent which will be negative for service industries like airlines, telecom and insurance. Currently, FMCGs pay about 24 to 25 per cent on excise duty, VAT and entry tax. Under the GST tax structure, this may be reduced to 18 per cent, but at 28 per cent this may disappoint the market. Also, telecom will be affected with a rate of 18 per cent from the current 15 per cent. An additional tax up to 1% will be levied on the inter-state supply of goods. Therefore, these goods do not come under VAT and have no input tax credit.

Central taxes to be absorbed under GST are:

Central Excise Duty

 Additional Excise Duties

Service Tax

Additional Customs Duty (Countervailing Duty)

Special Additional Duty of Customs – 4% (SAD)

Central Surcharges and Cesses in the nature of taxes on goods/services like cess on rubber, tea, coffee and national calamity contingent duty

State taxes to be absorbed under GST are:

State VAT/Sales tax

Entertainment tax

Luxury tax

Taxes on lottery

Betting and gambling

Tax on advertisements

State cesses

Surcharges in the nature of taxes on goods/ services, Octroi and entry tax and purchase tax

Excise and service taxes will be replaced with CGST, Local VAT and other state taxes will be replaced with SGST. CST will be replaced with IGST. Therefore, IGST is the total of CGST and SGST.

Alcohol and tobacco will have a separate excise duty in addition to GST. Petroleum and petroleum products will continue to be taxed under existing laws and will be incorporated into GST at a future date.

GST has the potential to boost India’s GDP by as much as 2 per cent and has been considered an unprecedented reform in the history of modern global tax. Taxpayers will not have the burden of multiple compliances under various states. With the GST tax structure, there will be a single registration and single return. This will help build and expand upon the Make in India initiative by the Government of India by attracting FDI and reducing costs. Hence, these costs are manufacturing costs in the form of reduced compliance cost and taxes.

Similar to the GST law, the CGST, SGST and UTGST laws will be addressed and strengthened at the levels of the Centre, States and Union Territories. Hence, the centre will introduce the CGST Bill and SGST bill shortly in the Legislative Assemblies.

Central and State officials will determine which goods and services will fall in which tax brackets and will be carried forward to the GST Council for approval. Also, they will decide which goods and services would attract a cess on top of the peak rate. This will compensate states for any revenue lost due to the implementation of GST in the first five years. Moreover, the government intends to roll out GST from 1 July, 2017. Therefore, GST will help with removing trade barriers and facilitating the ease of doing business. 

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How Accounting Standards Are Developed In India

Concept of Accounting Standards:

We know that Generally Accepted Accounting Principles (GAAP) aims at bringing uniformity and comparability in the financial statements. It can be seen that at many places, GAAP permits a variety of alternative accounting treatments for the same item. For example, different methods for valuation of stock give different results in financial statements.

 Such practices sometimes can misguide intended users in taking decision relating to their field. Keeping in view the problems faced by many users of accounting, a need for the development of common accounting standards was aroused.

For this purpose, the Institute of Chartered Accountants of India (ICAI), which is also a member of International Accounting Standards Committee (IASC), had constituted Accounting Standard Board (ASB) in the year 1977. ASB identified the areas in which uniformity in accounting was required. After detailed research and discussions, it prepared and submitted a draft to the ICAI. After proper examination, ICAI finalized them and notified for its use in financial statements.

Meaning of Accounting Standards:

Accounting standards are the written statements consisting of rules and guidelines, issued by the accounting institutions, for the preparation of uniform and consistent financial statements and also for other disclosures affecting the different users of accounting information.

Accounting standards lay down the terms and conditions of accounting policies and practices by way of codes, guidelines and adjustments for making the interpretation of the items appearing in the financial statements easy and even their treatment in the books of account.

Nature of Accounting Standards:

On the basis of forgoing discussion we can say that accounting standards are guide, dictator, service provider and harmonizer in the field of accounting process.

(i) Serve as a guide to the accountants:

Accounting standards serve the accountants as a guide in the accounting process. They provide basis on which accounts are prepared. For example, they provide the method of valuation of inventories.

(ii) Act as a dictator:

Accounting standards act as a dictator in the field of accounting. Like a dictator, in some areas accountants have no choice of their own but to opt for practices other than those stated in the accounting standards. For example, Cash Flow Statement should be prepared in the format prescribed by accounting standard.

(iii) Serve as a service provider:

Accounting standards comprise the scope of accounting by defining certain terms, presenting the accounting issues, specifying standards, explaining numerous disclosures and implementation date. Thus, accounting standards are descriptive in nature and serve as a service provider.

(iv) Act as a harmonizer:

Accounting standards are not biased and bring uniformity in accounting methods. They remove the effect of diverse accounting practices and policies. On many occasions, accounting standards develop and provide solutions to specific accounting issues. It is thus clear that whenever there is any conflict on accounting issues, accounting standards act as harmonizer and facilitate solutions for accountants.

Objectives of Accounting Standards:

In earlier days, accounting was just used for recording business transactions of financial nature. Its main emphasis now lies on providing accounting information in the process of decision making.

For the following purposes, accounting standards are needed:

 (i) For bringing uniformity in accounting methods:

Accounting standards are required to bring uniformity in accounting methods by proposing standard treatments to the accounting issue. For example, AS-6(Revised) states the methods for depreciation accounting.

(ii) For improving the reliability of the financial statements:

Accounting is a language of business. There are many users of the information provided by accountants who take various decisions relating to their field just on the basis of information contained in financial statements. In this connection, it is necessary that the financial statements should show true and fair view of the business concern. Accounting standards when used give a sense of faith and reliability to various users.

They also help the potential users of the information contained in the financial statements by disclosure norms which make it easy even for a layman to interpret the data. Accounting standards provide a concrete theory base to the process of accounting. They provide uniformity in accounting which makes the financial statements of different business units, for different years comparable and again facilitate decision making.

(iii) Simplify the accounting information:

Accounting standards prevent the users from reaching any misleading conclusions and make the financial data simpler for everyone. For example, AS-3 (Revised) clearly classifies the flows of cash in terms of ‘operating activities’, ‘investing activities’ and ‘financing activities’.

(iv) Prevents frauds and manipulations:

Accounting standards prevent manipulation of data by the management and others. By codifying the accounting methods, frauds and manipulations can be minimized.

(v) Helps auditors:

Accounting standards lay down the terms and conditions for accounting policies and practices by way of codes, guidelines and adjustments for making and interpreting the items appearing in the financial statements. Thus, these terms, policies and guidelines etc. become the basis for auditing the books of accounts.

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Impact Of GST On Chemical Industry

The time has come for India Inc. to buckle up and get ready for a momentous transformation in the nation’s industrial infrastructure. The Goods & Services Tax (GST) was passed on the 3rd of August and is projected to be one of the most compelling tax reform in the post-Independence India. GST rates for chemicals & chemical industry as per the discussions in the GST Council Meeting held on 18 May 2017.

Touted as one of the most poignant Constitutional Amendment Bill (122nd) passed by the Government of India (GOI), the GST will be recognized across all business verticals from the beginning of the 2017 Fiscal Year. As the nation’s finance & administrative structures prepare for a comprehensive implementation, it is essential for the Indian industries to postulate the direct as well as the indirect impact of the GST Bill.

The chemicals sector in India, in particular, is on tenterhooks regarding the result of GST implementation, considering the fact that Indian chemical industries have continued facing severe challenges owing to the mounting taxations.

What is GST?

The GST Bill is designed to be a pragmatic tax alteration aimed at simplifying the complexity of the existing tax systems, bringing down the production costs of goods & services, and clearing the disarray of variable value-added taxes (VATs) at all transaction levels. Simply put, the GST can be defined as a tax which takes into account the input credit tax liability while being levied and assessed at every stage of transactions of goods or services.

The framework of GST is based on the input tax credit method that shall allow businesses to assert their input stage tax liability during the next resale transaction. For example, when a manufacturer of polymer chemicals sells some volumes to a buyer, a certain amount of tax is imposed on the buyer while the manufacturer pays the required income tax.

After the first transaction, the buyer sells the polymer chemicals to an end-user industry. In the existing tax system, the tax rate of the first transaction will be added to the tax paid by end-user industry. In the GST mechanism, the second buyer (the end-user) gets to claim the input (first transaction) tax as a credit to the implied output (resale transaction) tax.

In order to ease the business operations among the states, the GST aims to reduce the procedural barriers, benefitting all the stakeholders by amalgamating the Central and State GSTs. Moreover, the reduced risk of tax evasions has been represented as a primary feature of the GST implementation.

The Bill will also revolutionize the existing taxation systems by defining a taxable event, measuring the levy rate based on the valuation provisions, and uniformly classifying every practicable statute of the Bill.

GST can have long-term positive impact on the chemical sector

Almost every predictable impact of GST on the Indian industrial sector looks positive, especially for the chemicals industry. Chemicals businesses in India have long suffered the wrath of added taxations on their production capacity as well as their consumption demands.

The existing taxations have impelled the rise in the production costs of manufacturing vital chemicals, which has resulted in the price-hike of the end products and made such goods unaffordable for gross consumption.

That’s why the GST Bill is trusted to be seminal for the unbarred progress of the Indian chemicals industry in the years to come.

Unification of taxes

The prime benefit of implementing the GST legislation is that it will integrate the chemicals market by decimating the tax complications grappling the interstate trade of chemical companies. To accomplish this, GST will incorporate the crucial Central and State taxes such as the Central Excise, the Service Tax, the Countervailing Customs Duty, the Special Additional Duty, the Central Sales Tax (CST) and other VATs. Such double taxations get more tedious when the end-user industries are located in various states and the taxations witness additions from the duty levied by the concerned State Governments. Owing to the fact that the Service Tax, CST and VAT levied upon interstate transactions differ according to the involved States, the GST will subsume them under three taxable levies – the Central GST (CGST), the State GST (SGST) and the Integrated GST (IGST).

The GST Bill will avoid any double taxation at combined rates and keep the rates of State-level tariffs consistent throughout the country. The inferring taxation will allow chemical manufacturers to produce chemicals and supply them to different States without any additional taxable duties.

Reduction of Production Cost

The facilitation of national trade has been hampered by the surging VATs implied on manufacturers of chemicals. The mitigation of CGST and SGST will also lower the cascading effect of multiple taxations on the production capacity of chemical industries.

For an instance, an agrochemicals manufacturer in Ludhiana has to deal with the burden of paying diverse taxes to the State Government in Punjab as well as the Central Government. In the process, the manufacturer ends up paying more than 25 percent of aggregated levies, and has no option but to hike the production value of the chemicals. The implementation of GST will result in exertion of IGST for interstate trade and SGST & CGST for transactions within a State. Consequently, the production costs and the resale prices of chemicals will be extensively lowered, urging the industry leaders to concurrently expand the gross production capacity of the chemicals sector in India.

 Ancillary advantages

The aforementioned benefits of lowered production costs and reduction of transactional tax rates will have a major influence on the growth of paints and construction chemicals industry. The booming real estate sector will continue to generate demand in construction chemicals market, but the implementation of GST will make sure that the construction chemicals retailers are not edged away from the sales profits. The absence of warehousing or supply chain costs will help maintain the affordable prices and promote the consumption of chemicals. Non-uniformity of VAT rates will be irrelevant as GST will be implied at a common rate (18-20%) upon every product sold in the chemicals industry.

The area-wise tax exemptions will not exist as every State will be taken into consideration equally, under the GST Bill. Lowered transit time, availability of chemical materials at the desired time, and hassle-free transportation systems are also observed as the indirect advantages of implementing the GST in the Indian chemical businesses.

The downside of GST implementation

Among all the levies merged, the Basic Customs Duty will be the only taxation exempted by the Bill and will continue to be charged post-GST implementation. While there aren’t many drawbacks of enacting the GST on the chemicals industry, there are a few aspects that need to be premeditated prior to the Bill implementation. The GST rates need to be same in every State in India, avoiding the conflict of interests between the State Governments. Varying GST rates will factor the diversity in profit based investment decisions throughout the chemicals sector.

The GST mechanism is based on the destination of the transaction, not the source. Therefore, the specification of where the goods are sold is necessary, which can be difficult for complex purchase orders existing among chemicals companies and other end-use industries. The efficient execution of GST in the chemicals sector is solely dependent on the acceptance and the onus of industry professionals and can lead to opposition in a worst-case scenario.

The service segment of the chemicals industry will take the most adverse effect owing to the surplus benefits allotted to the manufacturing and trading segments. On the other hand, the improved input tax credits and surging headline rate of the GST are likely to soften this “goods vs. services” inequity.

Future prospects

The assured compensation from the Centre to the designated State Government upon revenue losses experienced over a five-year period from the implementation date has made GST a promising prospect for the industrial growth of the nation. The ‘Make in India’ initiative, launched two years ago, has endorsed the importance of manufacturing sector. Successful implementation of GST Bill can serve the long-term interests of the chemicals industry.