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Transition To GST

Goods And Services Tax FAQs

Vishwanath read the draft GST laws that were available in the public domain. He knew that it would be some time before the final laws saw the light of the day. At the same time, he had seen television news anchors screaming that the Central Government was determined to bring the law into force from 1st July 2017.

The day was 15th of March or ides of March, the day Julius Ceasar was killed. He counted the days remaining for 1st July, the month named after Julius Ceasar, was just 108 days away. It left him nervous. Being a hard-nosed businessman, he wanted to initiate all the steps that he could for a successful transition to GST immediately.

He met Mr. Prasanna for this purpose. What do you mean by successful transition?

Mr. Prasanna explained that a business entity would have had a successful transition to GST if it is able to optimize its performance with least disturbance and also by being fully compliant with the new law.

He enumerated the Keys to successful transition:-

  1. Ensuring compliance with GST laws:
    First and foremost is to ensure that sufficient investment is made in terms of gaining knowledge about GST. Besides knowledge, the business need to invest in proper GST software so that periodical compliances are taken care of.
  2. Understanding the impact of GST on the vendors:
    GST would impact upstream of any business. The impact can be both positive and negative. Upstream would be suppliers of inputs. Vendors of raw materials, services and job workers to a manufacturer. For a trader, upstream would cover vendors for goods and services. In-depth study of the supply chain of the vendors would help identify potential areas of reducing cost of purchasing goods and services.
  3. Principles governing Input Tax Credit state that CGST cannot be utilized for paying SGST and vice versa. A business entity must analyze the kind of levy ie CGST, SGST or IGST that would be charged by the vendor of goods or services and whether it can be used for output GST. Necessary changes in the supply chain can be made so that input tax credit is optimally utilized.

  4. Reducing the number of vendors by consolidation and elimination:
    Input tax credit is available only if the supplier of goods or services has paid the output GST and filed the monthly return. It would be unrealistic to expect that all vendors would be prompt in paying GST and filing returns. If some vendors are remiss, then associated input tax credit would be delayed. Therefore, handling many vendors would be cumbersome under GST.
    Two pronged strategy can work.

    • A business entity can attempt to identify purchases that could be consolidated so that the number of suppliers can be reduced.
    • Vendors who are found to be wayward on compliance matters based on past track record can be substituted.

    Input Tax Credit FAQs

  5. Re-negotiating the contracts with Vendors:
    Contracts concluded in the pre-GST era must be re-negotiated and concluded afresh. Sufficient indemnity clauses can be inserted so that the vendors are compelled to bear any loss arising from default in complying with GST laws.
  6. Maximizing Job-work window:
    Supply to a job worker for the purpose of job work is not subject to GST. Further, the definition of job-work under GST law is much broader and is not limited to activities allied to manufacturing. This affords an opportunity for a business entity to identify activities that could be gainfully outsourced to a job-worker and thereby optimize operations.
  7. Modification of Distribution and sales network:
    In the pre-GST era, taxation was one of the, if not the decisive, factor in determining the location for operating warehouses. One of the significant impacts of GST would be that taxation would play a minor, if not a negligible role, in decisions of operating a warehouse. Business entity can relook at the logistics of distribution and eliminate warehouses that were being maintained purely for tax purpose.
  8. Modification of the Sales Process:
    A stock transfer made across States is taxable under GST. This implies that working capital would be locked up if goods are transported to a warehouse located in another state and kept idling. On the other hand, goods so stock transferred to another warehouse are sold immediately within the month, then the locking up of working capital can be avoided. This may warrant the business to refine the logistics process relating to execution of sales orders.
  9. Review the pricing of products:
    Transaction value is the basis on which GST is calculated. The concept of transaction value given in the GST law is quite nuanced. The base on which prevailing indirect taxes are levied may differ from the base on which GST is levied. The various other components of pricing such as discounts and other incentives given are also relevant in the context of the new law. Review by an expert of the pricing can help not only in ensuring compliance but also optimizing performance.
  10. Gaining insights on the potential impact of GST on the business of competitors:
    Last but not the least, it is vital that eyes and ears are kept open to understand as to how GST would impact competitors.

After listening pensively to Prasanna, Vishwanath was now overwhelmed by the weight of the task that was to be completed in the next 100 odd days. Prasanna tried to reassure him before bidding adieu. It is good that GST would be implemented from 1st July 2017, around the time of summer solstice when days are longer than nights. When the Sun is out and where there is will, there is always a way!

GST Services

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