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GST: The Changing Face of Indirect Tax

29 Sep 2010

The proposed introduction of Goods and Services Tax (GST) in India would be the most significant indirect tax change in India ever. The GST is a tax on goods and services levied at each point of sale of goods or provision of a service. At the time of the sale of goods or the provision of services, the seller or service provider can claim the input credit of tax which he has paid on the purchase of goods or the procuring of the service. Currently, about 150 other countries are following a similar system of indirect taxation (alternatively known as a Value Added Tax or VAT). Other countries, including Malaysia, the United States, and the countries of the GCC, are considering reforms in comparable directions. Taxand India identifies the impact of the GST on business and reveals why now is the time to start preparing.

In India, under the current indirect tax regime, different stages of economic activities are exposed to different kind of taxes. For example, manufacturing activities are subject to excise duty, the purchase and sale of goods is subject to Value Added Tax or Central Sales Tax on intra-state and inter-state transactions respectively, activities related to the provision of services are subject to a service tax, etc. In addition, there are taxes such as the entry tax on the entry of goods into a state, entertainment tax applicable to the entertainment industry, luxury tax on the hotel industry, etc. Such disjointed and multiple levies of taxation by multiple governments (Central Government and around 30 State Governments), has resulted in blockage of tax credits, tax cascading, increased compliance obligations and costs in addressing the complexities of determining the tax jurisdiction, tax base, etc.

With a view to rationalising these conflicting and cascading levies, India has proposed the introduction of the GST from April 1, 2011. The introduction of the GST will streamline the movement of goods across India with a single tax structure replacing the current multiple tax system. Under the proposed GST structure, all the major indirect taxes would get subsumed replaced with the GST, with the exception of certain state municipal levies.

However, given the federal political structure, India has proposed to adopt a dual GST model, whereby every transaction related to goods and services would be subject to a Central GST to be levied by Central Government (CGST), as well as a State GST to be levied by the State Government (SGST). A full input credit system would operate in parallel for CGST and SGST, however, cross utilisation of input tax credit between CGST and SGST would not be permitted. Every state would have its own State GST legislation imposing its SGST, with common basic features across the various States. This is pertinent to maintaining uniformity and consistency across States and to converting India into a common market.

Taxand's Take

Businesses need to gear up to manage this transition to the GST in India, ideally now while the government is preparing for the new law and administration. GST will have a significant impact on almost all aspects of businesses operating in the country, including the supply chain, sourcing and distribution decisions, inventory costs and cash flows, pricing policy, accounting and information technology systems and transaction management. To prepare for the GST, companies need to understand its full implications, prepare a roadmap for a smooth transition, and make and test system changes.

While the important dimensions of the new tax structure are being closely examined, the time is ripe for the businesses to start preparing for a successful changeover and implementation.

Implementation of GST could be one of the significant steps in the direction of constructive change. The GST will mark a new era in the history of indirect tax regime in India and the Government should have no reason not to fulfil the expectations of the taxpayers. A resilient regime should answer all concerns.

Your Taxand contacts for further queries are:
Rajeev Dimri
T. +91 124 339 5050

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