THE IMPACT OF GST ON INDIAN CORPORATE GOVERNANCE

Transcription

1 THE IMPACT OF GST ON INDIAN CORPORATE GOVERNANCE Rishi Raj Kumar Bharadwaj 1, Dr. Praveen Kumar Gupta 2 1 Associate Professor, 2 Professor, IIMT College of Engineering, Greater Noida ABSTRACT It is an omnipresent fact that no one can escape the death and the taxes. The most awaited frontier GST viz. Goods and Services Tax has finally arrived. Nevertheless the pitch work is still in early stages and the final landing is proposed effectively from 1 st April There is a lot of ground work which has to be done, so that the teething troubles can be minimized and the GST can be implemented with full punch. Earlier, distinct taxes or duties were imposed on the basis of various mind-numbing concepts of manufacturing cost, value addition/subtraction, origin, territorial issues etc. There have been umpteen committees, commissions, amendments etc. in the pre as well as post-independence era of Indian taxation system. With deep plunging into the intricacies of various provisions of different taxation, the GST has ultimately emerged as an umbrella tax, which will embrace mostly all the taxes and duties and be charged as a single unified tax. This study attempts to enlighten on various issues in reference to the origin, evolution and the probable implications of GST regime on corporate governance in general and Indian corporates in specific. Keywords: Goods and Services Tax (GST), Direct Tax, Indirect Tax, Import Duties, Excise, Service Tax, Octroi, VAT, SAD, INC I. INTRODUCTORY ISSUES OF GST The Indian Constitution allocates taxation powers between centre and states. Be it the state of the centre, both kinds of government have some exclusive areas, where they can levy tax. Income tax, which includes tax on company profits, is the exclusive domain of central government. These taxes are termed as the direct taxes. On the other hand the indirect taxes are taxes levied on manufacture of goods, provision of services and consumption. In India, generally speaking, indirect taxes levied on manufacture of goods or provision of services are the exclusive domain of central government. Taxes on consumption are the exclusive domain of state governments. There are two important problems with the current arrangement. First, keep in mind that some good such as a shirt has to first be manufactured before it is consumed. The central government, therefore, levies its indirect tax called central excise at the factory gate. Subsequently, a shirt reaches a retail outlet and is bought by a consumer. The state government, at this stage, levies a tax on consumption dubbed value added tax (VAT). So, we have a tax at the factory gate which adds to the cost of the shirt and another tax on the final price. 378 P a g e

2 Since states have their exclusive domain on consumption tax within their borders, they treat goods coming from other states as "imports." For example, if a shirt maker in Uttar Pradesh buys dye in Bihar, he would have paid central excise and Bihar's state taxes on the product. On this cost, Uttar Pradesh government would levy its tax if the shirt is sold in the state. If the shirt is sent across Uttar Pradesh's border and sold in Delhi, an "export" tax called central sales tax is collected by UP. As the example suggests, India is politically one country, but economically it is fragmented. There are multiple taxes when there is commerce across state borders. Consequently, it increases costs for everyone and makes economic activity within India for Indians complicated. The Rajya Sabha had finally consented to debate a constitutional amendment to bring about a system of Goods and Services Tax (GST) in India. And inarguably, the motion is passed with majority. It is perhaps the most important economic reform item on the Narendra Modi government's agenda. This is one reform which affects all of us. Needless to say, GST also happens to be a complicated reform as most taxation matters usually are. II. THE ROAD AHEAD Going in to the roots one can clearly identify that the Goods and Services Tax (GST) is an indirect tax reform which targets to remove tax barriers between states and create a single market. To make this a reality, firstly the Indian constitution needs to be amended to remove different layers of governments' exclusive powers to levy taxes. And finally once this measure is materialized, the tax barriers between states, and centre and states will disappear. Mainly GST would replace most indirect taxes currently in place such as: Central Taxes Central Excise Duty [including additional excise duties, excise duty under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955] Service tax Additional Customs Duty (CVD) Special Additional Duty of Customs (SAD) Central Sales Tax ( levied by the Centre and collected by the States) Central surcharges and cesses ( relating to supply of goods and services) State Taxes Value Added Tax Octroi and Entry Tax Purchase Tax Luxury Tax Taxes on lottery, betting & gambling State cesses and surcharges Entertainment tax (other than the tax levied by the local bodies) Central Sales Tax ( levied by the Centre and collected by the States) The constitution amendment bill only changes the overarching principle of indirect taxation in India in order to create a common market. Details of GST have yet to be worked out. It is only after details have been worked out can the final GST rates be fixed. 379 P a g e

3 Therefore, after the constitution is amended, the centre and states have to pass a separate legislation which fleshes out the details of GST. Eventually, this will be followed by subordinate legislation which further draft the relevant provisions and procedures. In short, the constitution amendment is just the beginning of the legislative journey. Nevertheless the Indian Government is committed to introduce GST by April 2017 and the tax payers need to be GST compliant to be able to test system changes in time. Depending on the operating geographies, size and sector and the changes would be substantial and may require a proactive planning with a time bound action plan. In order to prepare for the implementation of GST, the companies need to understand the GST policy development and its implications to scenario planning and preparing a transition roadmap. Since the Bill has been passed in Rajya Sabha, the Bill will be needed to be passed by Lok Sabha and ratified by minimum of 15 States in their respective assemblies before the President can give its assent for its enactment. GST Council consisting of representatives from the Centre as well as State will be formed within 60 days of the enactment of the Bill. The council will make recommendations to the Union and the States on model Goods & Service Tax laws, the rates including floor rates with bands of goods & service tax, the Place of Supply rules and any other matter relating to GST as the Council may decide Reports of Joint Committee constituted by Empowered Committee of the State Finance Ministers on business processes of payment, registration refund and return under GST have been released and put in public domain for suggestions. The draft model GST Law was released and put in public domain in June GST Network, an IT backbone of GST, which will facilitate online registration, tax payment and return filing will be launched. States will frame their respective GST Legislations to enable them to implement GST. It will be in line with the Central GST Legislation. III. SPLITTING UP OF GST The power to make laws in respect of supplies in the course of inter-state trade or commerce will be vested only in the Union government. States will have the right to levy GST on intra-state transactions including on services. Centre will levy IGST on inter-state supply of goods and services. Import of goods will be subject to basic customs duty and IGST. GST is defined as any tax on supply of goods and services other than on alcohol for human consumption. Central taxes like, Central Excise duty, Additional Excise duty, Service tax, Additional Custom duty and Special Additional duty and State level taxes like, VAT or sales tax, Central Sales tax, Entertainment tax, Entry tax, Purchase tax, Luxury tax and Octroi will subsume in GST. 380 P a g e

4 Petroleum and petroleum products i.e. crude, high speed diesel, motor spirit, aviation turbine fuel and natural gas shall be subject to the GST on a date to be notified by the GST Council. Provision for removing imposition of entry tax / Octroi across India. Entertainment tax, imposed by States on movie, theatre, etc will be subsumed in GST, but taxes on entertainment at panchayat, municipality or district level to continue. GST may be levied on the sale of newspapers and advertisements and this would give the government s access to substantial incremental revenues. Stamp duties, typically imposed on legal agreements by the state, will continue to be levied by the States. Administration of GST will be the responsibility of the GST Council, which will be the apex policy making body for GST. Members of GST Council comprised of the Central and State ministers in charge of the finance portfolio. Advantage Destination Principled GST The GST structure would follow the destination principle. Accordingly, imports would be subject to GST, while exports would be zero-rated. In the case of inter-state transactions within India, the State tax would apply in the State of destination as opposed to that of origin. GST has been envisaged as a more efficient tax system, neutral in its application and distribution is attractive. The major advantages of GST are: Wider tax base, necessary for lowering the tax rates and eliminating classification disputes Elimination of multiplicity of taxes and their cascading effects Rationalization of tax structure and simplification of compliance procedures Harmonization of centre and State tax administrations, which would reduce duplication and compliance costs Automation of compliance procedures to reduce errors and increase efficiency GST- Impact on Consumers and Customers Presently the current generation of the consumers are completely in darkness and they have no idea about the extent of taxes they pay on goods. If you get a bill after buying merchandise which gives the extent of VAT you have paid, it is an understatement of the actual tax you have paid. One should remember, well before merchandise reached the retail outlet, the central government has collected excise duty. The extent of excise duty is not mentioned in the bill. Therefore, today it is reasonable to assume we have been commutatively paying well over 20% various kinds of taxes for most merchandise we buy and the kinds of services we use. On the contrary under the GST system, consumers should benefit in two manners. Firstly, all taxes will be collected at the point of consumption. It means that if a shirt is taxed at 18%, it will include both central government's taxes and state government's taxes. Transparency in taxation should deter state as well as the central governments from indiscriminately increasing taxes as there is bound to be public backlash for multi-staged taxes. 381 P a g e

5 Secondly, once barriers between states are removed, we as consumers will not end up paying "tax on tax" which is actually what painfully happens when goods move across state borders. GST Impact on the companies and their governances One of the best bet of the GST is that it is going to provide ease of doing business, which is very much appreciated by the corporates around the globe. And of course it s the time to cheer up for the almost every sector Indian INC. A bird s eye view can be understood from the above diagram, which explains the prospects and probabilities GST on various sector of the economy. And it is the high time for the Indian corporates to tighten their belt as the coming months post GST will certainly have some teething troubles. So the pitch is set. All one needs is to keep oneself in rhythm of change and embrace this change gracefully. While GST becomes a reality in the coming year the impact on operational sectors can be understood as follows: 382 P a g e

6 Sourcing Distribution Pricing profitability Cash flow and Inter-State procurement could prove viable This may open opportunities to consolidate suppliers/vendors Additional duty/cvd and Special Additional duty components of customs duty to be replaced. Changes in tax system could warrant changes in both procurement and distribution arrangements Current arrangements for distribution of finished goods may no longer be optimal with the removal of the concept of excise duty on manufacturing Current network structure and product flows may need review and possible alteration Tax savings resulting from the GST structure would require repricing of products Margins or price mark-ups would also need to be re-examined Removal of the concept of excise duty on manufacturing can result in improvement in cash flow and inventory costs as GST would now be paid at the time of sale/supply rather than at the time or removal of goods from the factory. System changes and transaction management Potential changes to accounting and IT systems in areas of master data, supply chain transactions, system design Existing open transactions and balances as on the cut-off date need to be migrated out to ensure smooth transition to GST Changes to supply chain reports (e.g., purchase register, sales register, services register), other tax reports and forms (e.g., invoices, purchase orders) need review Appropriate measures such as training of employees, compliance under GST, customer education, and tracking of inventory credit are needed to ensure smooth transition to the GST regime There is no doubt that the Indian corporate have to work extra mile to suit themselves to the new tax regime of GST. Nevertheless for the greater good this positive move will not only bring out more transparency in the taxation system, but also act as the major catalyst for a growth hungry economy like India. Suggestive strategy for embracing the GST positively are as follows: Comprehend key areas of impact in their business. Pre-emptively prepare for various scenarios for the design and application of GST. Constantly track policy development regarding GST and update prepared scenarios. Detect any areas of adverse impact and formulate contingency measures. 383 P a g e

7 Recognize issues and concerns requiring representations to the authorities and develop a next strategy for effective support. IV. CONCLUSION Since the time immemorial on one hand businesses have evolved with distinguished set of terms and conditions, while on the other hand the regime of taxation have not let anyone slip away from the deadly tentacles of vicious web. The GST which was conceived more than a decade ago has finally been delivered. And here comes along a new era of taxations. The governance issues will take their own toll. Nevertheless the Indian Corporates should be on their toes to adjust and triumph the aftershocks of the GST wave. Let us never forget the wise words of Justice Hughes who observed that no democracy can survive without respect for laws and institutions, but that in a free democracy laws and institutions will command that degree of respect which they deserve. To be precise, the parting thought is that the battle is won, but the war is still in waiting. REFERENCES [1]. The Goods and Services Tax Bill, 2011 [2]. The Income Tax Act, 1961 [3]. The Excise Act, 1944 [4]. The Customs Act, 1962 [5]. The Central Sales Tax, 1956 [6]. The Service Tax [7]. The Companies Act, 2013 [8]. The Finance Act, 2015 [9]. The Mint Newspaper 384 P a g e