Goods and Services Tax (GST) is a revolutionary new tax system which does away with multiple taxes and introduces a Uniform Indirect Tax regime. Businesses don't have to deal with multiple compliances and one single tax will rule them all (Reminds us of Lord of the Rings, One Ring rules them all)
In a way it's a huge leap forward for businesses which had regularised operations in "White" (white is the term used to denote legitimate transactions which are reported through banking system) and they will always welcome such a move. But the Impact of GST needs to be evaluated for various businesses which are currently able to escape the tax by dealing in cash by virtue of being unorganised.
TAX CREDIT FROM UNORGANISED SECTOR
Credit for Taxes paid (or Input Credit) on payments made to vendors within the State for Interstate Transfers is the biggest advantage of GST. While CENVAT was also available earlier it did not allow VAT (Value Added Tax) credit against CST (Central Sales Tax). Also businesses which dealt with the unorganised sectors were usually not in a big pressure to claim the credit as the VAT rates were lower and were usually factored into the Cost of the Goods or Services. With GST rates expected to go as high as 18% backed by strong anti-escape measures, factoring into cost will no longer be an option for businesses and most of the Unorganised Sector Units will have to provide bills and will be covered under GST.
Retail already struggling with a fall in prices will see the most significant hit. The reason is that Retail Businesses work on the Concept of MRP (Maximum Retail Price) which is inclusive of all taxes. To add to the woes most of them have unorganised businesses or exempt goods which will not give them any Input Credit. If these weren't bad enough, most Retail Chains work on a Net of Tax Approach where they raise POs for goods sent to the Outlets but pay when the Goods get sold. This means financing an increase of around 10-12% on the Cost of Goods sent to the Outlets irrespective of whether they get sold. There are a couple of strategies which can be used to reduced the hit on this which I will cover in a separate post.
Probably the worst hit in the GST era would be E-Commerce Platforms. What surprises me more is the ignorance of all experts to highlight this fact. It is common knowledge that E-Commerce works on a Marketplace model. Which means that the price of the Goods and the Taxes are fixed by the Vendors selling on the platform. With GST we will obviously see these prices going up. That combined with the delay in Reverse Logistics and Reducing Platform driven discounts will mean vendors will have to bear a bigger hit if selling online and there will be lesser buyers online because discounts is all they relate Ecommerce to. This may be a very bad situation for Ecommerce to be in if they don't insist on shifting the point of Sale to the point of Expiry of the 30 days Return period which they usually give. But again that's subjective so it's something which the Ecommerce players need to figure out quickly.
DEPOT TRANSFERS FOR PAN INDIA BUSINESSES
One of the most Unnerving aspect of GST is that applicability of GST on Supply vis-a-vis Sale. This is also visible in the name of the law as well which is called "Goods and Service Tax" and not "Sale of Goods and Services Tax". This means that inter-state depot transfers which is very common for businesses will get covered. However, there is an anomaly as there has been no way prescribed for valuing such a transfers. Irrespective of what method is prescribed, this will mean an additional obligation on businesses to track and tax their transfers.
CGST/ SGST/ IGST IMPACT ON ALL BUSINESSES
The GST collection is split into Central GST (CGST), State GST (SGST) and Integrated GST (IGST). The reason for such a split is to protect the interests of the State and enable make good the revenue loss of the states. Such a Split will mean that the collection of SGST will be under the jurisdiction of the relevant states. A lot will then depend on how these states enforce such collection and there is a chance that the red tape which businesses faced with the Sales Tax Departments may come back to haunt them especially with splits like these make it a little challenging for smooth compliance. Guidelines to make good any non-compliance should be made Business Friendly and it has to be ensured that draconian powers are not vested to the respective authorities.
So while there is a lot of advantage which appear to be in place for manufacturing businesses which are currently under multiple regulations, there is going to be an additional compliance requirement for a lot of businesses who were otherwise under individual tax coverage such as Traders and Service Sector Companies given the split of the Taxes into CGST, SGST and IGST.