GST: The transition issues and what it means for India

The Government of India is going to officially launch Goods and Services tax (GST) at midnight on Friday June 30, 2017. With this, a new era is being  heralded in Indian economy with the motto of 'One Nation One Tax'. 

However, GST, as accepted by the Government, is going to see some hiccups in the beginning as is the case with any disruption. Past few weeks has seen companies destocking their products at a rate faster than expected. Industry experts believe that normalisation may return to the Indian economy only by the third quarter (Q3FY18) of the current fiscal, i.e. September to December 2017 period. 

Experts say that due to lack of clarity and uncertainty over availability of input tax credit, trade channels have started liquidating inventory before GST rollout. This will adversely impact revenue of the first half of the year and profitability of companies as things are only expected to normalise towards Q3FY18.

ALSO READ: What is Input Credit? Here's what you need to know about it

Manoj Bahety, Nilesh Aiya and Ankit Dangayach of Edelweiss Securities Ltd, in a report dated June 27, 2017 said, "It is encouraging to see the government’s intent to ensure smooth rollout of GST through relaxation of various requirements (deferral of e-way bill, extension of returns filing, increase in composition limits, relaxation for e-commerce, etc). We reiterate that GST will usher in a much simplified tax structure in the country, bring in cost efficiencies and result in market share shift from unorganised to organised players."

GST is likely to bring cost efficiencies leading better compliance which could lead to lower taxes in the future. 

However, teething issues are expected in the beginning. 

Industry experts believe that organised players may see some slowdown in the beginning due to inventory de-stocking in their supply chain. 

Wholesalers and large distributors are already compliant with most systems and have their process in place. It is the traders and small or regional distributors that may see cascading impact. 

The Edelweiss trio said, "Despite clearly laid GST rules for claiming input tax credit (ITC) on transition inventory, trade channels continue to undertake de-stocking due to lack of awareness regarding procedural aspects to claim ITC and uncertainty over certification of input tax credit. Our interactions with industry participants (dealers, distributors and manufacturers) across key sectors indicate that inventory de-stocking has gained pace in June and trade flow is expected to normalise from Q3FY18. Refer below sections for detailed sector-wise glimpse of our interactions."

For the end consumer, GST transition is likely to be smooth and beneficial. 

 The International Experience

The anti-profeering clause has been inserted in the GST to make sure that businesses would not be allowed to unduly benefit from lower GST rates or availability of higher input tax credit.

The government has clarified that the anti-profiteering clause is only an enabling provision and would be enforced only in rare circumstances. We believe that there are several challenges (including reference point for comparison) to enforce the anti-profiteering clause and companies may not pass on entire benefits of lower indirect tax rates or may take a price hike immediately before GST rollout to escape the provisions of anti-profiteering clause. Further, product prices are influenced by multiple factors and it will be difficult to quantify the extent of benefit of lower taxes passed on.

The committee will ask businesses to refund the price reduction, on proportionate basis, to consumers. Where consumers cannot be identified, the amount would be credited to the consumer welfare fund.

However, in India's case this will be rare as high proportion (30% of Consumer Price Index (CPI) basket) of goods (mainly agri and allied items) and services (housing, education, transport and communication; 15% of CPI basket) are currently not subject to tax and will also be exempt/zero rated under GST. Further, specified petroleum products and electricity (5% of CPI basket) are outside the purview of GST. For the balance products (50% of CPI basket), transition to GST will not significantly impact inflation in our view (refer detailed discussion on inflation in following sections).

Nonetheless, the government is committed to ensure that GST benefits are passed on to ultimate consumers, Edelweiss report said. 

The Shift

GST is one of the major catalysts that will spur growth of organised players. "In the GST regime, the shift of trade from unorganised to organised sector is expected to accelerate as GST will eliminate/reduce the tax arbitrage (including tax evasion) and advantages currently enjoyed by unorganised players. GST will thus create a level playing field between unorganised and organised segments," Edelweiss report said. 

"GST, a destination-based tax, will create a trail of various transactions. At every level, traders will have to register invoices to claim input tax credits. The entire process will be online, facilitated by an IT infrastructure," the report said. 

Moreoever, liability to pay GST depends on the nature of the transaction and registration status of the dealer.

Since the liability to pay GST on purchase of goods from unregistered dealer is on the receiver (registered dealer) of the goods/services, tax compliance will improve benefitting organised players, the report said. 

Finance Minister Arun Jaitley, in an exclusive interview with Zee Business said, "Any change in status-quo is called disruption. Yes, there will be hiccups like IT systems may get overloaded but those issues are also resolved within hours. Apart from this, the way business is done in India will change and lastly, tax evasion will not be possible because of GST’s checks and balances."

"A more efficient system leads to larger compliances," Jaitley said.