GST: Is India Inc Ready?

The Goods and Services Tax (GST) is set to become reality. But while the government has successfully resolved the political deadlock, India Inc. faces several challenges before it can get ready for the new tax. This survey by Business Today and BMR Advisors seeks to assess industry's preparedness as well as perception towards GST by capturing responses of top business and tax leaders through a web-based questionnaire.

Welcomed By Industry

The most striking conclusion of the survey is that the new law has been warmly welcomed by industry. Over three-fourths of the 66 CEOs/senior executives surveyed said GST would be beneficial for their organisation and is an essential tax reform.

More than half the participants believe that GST will bring monetary gains to their business and more than 49 per cent do not foresee any significant increase in tax compliance costs. Interestingly, around 28 per cent expect the expenditure on tax compliance to go down after GST is implemented. This outlines industry's optimism around the new tax.

Running Behind The Clock?

While GST has been welcomed by majority of the respondents, a meagre 19 per cent believe that their organisation's current readiness level can be marked above 50 per cent. In fact, 45 per cent respondents indicate that once the GST law(s) are notified, their organisation would need more than six months to prepare for it. This means that despite eagerly waiting for the new tax system for so long, industry is simply not prepared for it. Not surprisingly, more than 59 per cent respondents say they are yet to evaluate the likely impact of GST on prices of offerings of their organisation. Obviously, there is much to be done.

Not A Realistic Timeline!

A major reason for industry's unpreparedness could be that most corporate honchos still believe that April 1, 2017, is not a realistic deadline for rollout of the new tax system. This is evident from 58 per cent respondents rooting against it. The implementation process will involve setting up of the GST Council, passage of final GST law(s) in the upcoming winter session of Parliament after recommendations of the Council, and issuance of various rules, regulations, notifications, forms, etc, all before the implementation date of April 1, 2017. Development of a robust IT backbone, departmental training, responding to various industry issues, and establishing a smooth transition mechanism for taxpayers are other indispensable requirements for the government to avoid a rushed launch of the new tax regime.

Wanted: A Perfect GST

The government has been consistently criticised by subject experts and some opposition parties for proposing to bring in partial GST by keeping major tax generating commodities outside its ambit, including alcohol and petroleum. This has been alleged as a tool to bring the majority of states on board. While the government has expressed its willingness to bring the excluded segments within the scope of GST at a later date, 29 per cent respondents are of the view that these sectors should be covered under the new tax from the first day itself. Interestingly, only 7 per cent respondents are in favour of keeping these products outside forever. Clearly, industry wants a perfect GST that will cover all sectors.

Wish List From Government

We also asked our respondents about their expectations from GST as a taxation policy. The prominent demand of industry seems to be tax certainty and transparency from the government. A frequent suggestion is issuance of a clear set of rules and legislation with minimal scope for interpretation and ambiguity. Multiple incentives such as area-based exemptions, tax benefits to export-oriented units and hardware/software technology parks, etc, available to industry under existing tax schemes should also continue under the new regime, say most.

As far as the tax rates are concerned, industry's desire seems aligned with the opposition parties' demand that they be moderate. An overwhelming 91 per cent respondents indicate that the demerit rate should be kept within the 24-30 per cent range, and most of them expect a lower rate of 12-14 per cent. The standard rate is accordingly anticipated to be 16-18 per cent. Moderate rates are likely to check the possible short-term inflation while the economy adapts to the new regime.

When asked for measures expected from the government for smooth transition to GST, the respondents ranked setting up of grievance cells and expert committees for redress of various legal and operational issues as the most critical measures. Further, there is a clear demand for installing easy compliance procedures with minimum interface between the tax department and the tax payer to facilitate ease of doing business. Congenial attitude of field tax officers is another big demand.

More Than Just A Tax Reform

GST is being anticipated as one of the most prominent tax reforms in India since Independence. It is likely to impact almost all spheres of business, including sales and marketing, accounts & finance, supply & distribution, human resources and IT infrastructure. Organisations would need to deploy cross-functional teams to conduct a comprehensive SWOT analysis and implement relevant measures.

Nearly half the respondents agree that their organisation will require a thorough review of the existing operational structure. That said, the survey throws up alignment of IT/ERP systems as the most critical area that India Inc. needs to address. It is followed by pricing policy review, logistics management, personnel training and advocacy.

METHODOLOGY

Business Today and BMR Advisors approached a 66-strong C-suite audience (CEOs, MDs, Chairmen, Presidents and CFOs), tax heads and managers, and tax experts across sectors and sought their response to the introduction of GST. The survey questions were designed to garner their opinions on two key issues - industry's perception about GST and its level of preparedness for migrating to the new tax regime. To develop the questionnaire, executives from BMR Advisors brainstormed on potential challenges ahead, perceptions about the new tax, nuances of the Model GST Law, the government's readiness and what industry needs to have in place for a smooth transition to the new system.

What Tax Heads Have To Say

The essence of GST is seamless flow of tax credits through the supply chain till the consumption takes place to ensure there is no tax on taxes levied at earlier stages. This, coupled with uniformity in tax rates across the states, is expected to establish a single market across the country.

However, easier availability of tax credits is likely to be coupled with early cash outflow towards output taxes as taxable events might be advanced. The potential increase in tax rate on services and possible taxation of stock transfers seem to be the factors contributing to more than 67 per cent of the respondents predicting their organisation's working capital requirements will rise under GST. Around half the respondents said a substantive revision of taxation processes would be needed within their organisations.

To conclude, industry's outlook towards introduction of the new tax is fairly positive and welcoming. It is likely to rationalise indirect taxation and could increase the confidence of the business community in the Indian taxation system, which otherwise is hugely complex and inefficient. Industry expects the government to support smooth transition to the new system.

At the same time, India Inc. seems far behind in preparedness given the government's timeline of April 2017 for implementation. Industry needs to commence working on an effective transition plan. And fast.