Under a unified tax structure, the ideal situation is to have a moderate tax rate and a broad tax base, writes Abhishek A. Rastogi in ‘ Illustrated Guide to Goods & Services Tax (GST) ’ (www.taxmann.com). He informs that in various countries where the tax had been levied on a narrow base, subsequent changes in the base were felt necessary to minimise anomalies and distortions.
Emphasising, therefore, the need to get the structure right from the start, the author mentions that the likely options could be a negative list of services, non-extension of location-based exemption excise benefits, taxation of presently-exempted items, and covering non-taxable items under the GST.
He adds, however, that GST has more to do with a better administration than the concept. Although various improvements have been made in the tax design and administration over the past few years (e.g. large taxpayer unit scheme, and automation in central excise and service tax), the systems remain complex, and suffer from substantial compliance gaps, rues Rastogi.
“At the time of implementation of the GST, steps should be taken to achieve the following common objectives: simple design of tax forms, easy procedures for registration and filings, minimum record-keeping requirements, facilitation of voluntary compliance, strengthening of governmental audit teams, reduction of unethical practices, automation and electronic filing.”
In a chapter on ‘getting ready for GST,’ the author advises companies to form teams within the finance and accounting departments to assess the impact of GST on business, and to remain indirect-tax optimised. “They now need to analyse their business models and their supply chains, from procurement to production through distribution, to ensure that the impact arising from the taxation reform process is adequately factored in.”
He counsels companies to think through GST adoption well, lest there be cash flow pressures. For instance, preparing a budget to understand the cash flows under a GST regime will help the company see how well it is equipped to meet its monthly, quarterly, or annual GST commitments. A way to do this would be to collate the data of the last two years and perform a simulation exercise to compute liabilities that may arise, guides Rastogi.
He recommends SMEs (small and medium enterprises) to revisit their current banking facilities and check how well they will be supported in a GST environment. “The degree of advantage enjoyed by the SME will be directly proportional to the ‘quantum of goods sold against down payment’ and the ‘quantum of goods purchased against credit.’ In other words, under a GST regime, an entity with a heavy pipeline of inventory is advised to leverage supplier credit to service its work-in-progress inventory.”
Another takeaway in the chapter is the discussion of cost-efficiency through a restructuring of operations. For example, “distribution channels based on a hub-and-spoke model can be developed which will be very cost effective since pass-through credit of IGST (interstate GST) will be available across all States in a transparent manner.”
Instead of having warehouses, depots and consignment agents in each State, it will be economical to have locations of warehouses at strategic locations in a few selected States and distribute the product to nearby States from such depots or warehouses, the author explains. He also sees a role for ‘interstate trading houses’ to facilitate the transactions of SMEs, on the lines of ‘merchant exporters’ in the physical exports space.
Recommended addition to the finance and tax professionals’ shelf.
