GST Transition Provisions, Transitional Challenges under GST Regime. India is committed to implement Goods and Service Tax (GST). GST is expected to be implemented from April 2017 or a little later. The tax system is currently in the drafting stages with a few undecided issues holding up the agreement between the States and the Centre. The implementation of GST does not just involve tax reform, it is instead a complete business reform. The focus is on discipline being enforced on those carrying on business activity. Therefore, changing the historical ways of doing business calls for larger challenges and increased sense of responsibility as any slip up can also have the business continuity/ survival risks. now check more details for “GST Transition Provisions, Transitional Challenges under GST Regime” from below…
GST Transition Provisions, Transitional Challenges under GST Regime
Finalising GST Transition Model
The first and foremost challenge is to understand what is the right model for your business to implement the GST. Broadly, there are three models:
a) Model 1: In-House Implementation Model: Implementing GST with its (companies/ business’) own internal team by developing a core GST Team. This can be an appropriate model when the system and controls are well-organised and the company has separate tax teams with pool of industry knowledge as well as taxation in order to plan and execute GST implementation. It could only involve outside professionals to validate and confirm its ideas.
b) Model 2: Out-source Implementation Model: This involves outsourcing the entire GST transition aspects from planning to execution to outside professionals. This can be apt where the size of the business is very small and the company does not have adequate resources in terms of professionals with expertise in indirect taxation.
c) Model 3:In-House + Outsource Implementation Model: Developing a core internal GST team plus obtaining the assistance of professionals as a knowledge partners. In this model, GST would be implemented with collaborated efforts of internal team and the outside professionals clearly dividing the roles and responsibilities of internal team and the external experts. This is more appropriate model for major of the companies who have fairly decent capacities in respect of the executing manpower and knowledge of the taxation system. The capacity and the knowledge can be optimally utilised by partnering with the professionals.
Credits Transit, Maximisation, Documentation, Methodology
- Various transitional provisions have been prescribed to deal with transfer of credits in the GST regime. However, transition of credits is going to be a big challenge in the GST regime especially for the following businesses:
- Where credits in books have not been/ are not reconciled with returns over a period;
- Book stocks do not match the physical stocks. There is no regular stock taking exercise being conducted;
- Tax invoices received from vendors are not being properly filed/ documented, or not being obtained at all;
- Ineligible and improper credits are availed in the books and returns with no eligibility checks on the credits;
- Credits are missed either due non-availability of credit availing document or missed due to oversight or credit assumed to be ineligible which is eligible or credits missed transferring in return from the books. Such businesses must run a credit check for the last one year and avail the credits where possible.
The Transitional provisions relating to transfer of credits are not clear and provide multiple views. Further, certain aspects of transition of credits are not at all dealt with in the revised model law also. For instance, the methodology for transit of credit availed on Spectrum rights which needs to be availed over a period of 3 years has not been provided in the model law. It is not clear whether the balance 2 years’ credit can be transferred to GST regime or not. There are many more practical issues in credit transition. Therefore, proper care must be taken while availing/ transferring the credits ensuring due compliance of the law. Whether to avail the credit of disputed credits could be a vital decision which would require legal confirmation considering the latest case laws as also the time limit of 1 year of the invoice. Further, businesses must have proper documentation, trails in place to establish the claim of the credit at a later date during departmental audits.
Business Model Restructuring
Businesses could undergo a change due to the advent of GST. Those who act and restructure their model as per the requirements of the GST would definitely have a competitive edge. Various restructuring aspects that can be considered are:
- Whether to change/merge the manufacturing location, principle place of business;
- Adding/deleting locations of storage and supply, being closer to customers/vendors- Making national presence- No State barriers for supply exist in GST;
- Shutting down locations, warehousing strategy, change in supply chain management;
- Whether floating a new entity for separate business verticals is required?;
- Management hierarchal/reporting changesRobust de-centralised reporting required;
- Examine the present projects which have been based on position prior to GST;
- Venturing into new avenues;
- Assessing collaborations, partnerships, mergersGeographical expansion & business line expansions; and
- Change in Sourcing strategies- Local/import/ inter-state/SEZ.
Understanding the nature and extent of re-structuring along with the time required vs available would be important. Further, actual implementation of the restructuring would be critical task and needs to be monitored.
Optimising the cost of GST transactions would be the need of every business to remain/ get to be competitive. Various options may have to be examined. Re-engineering exercise for those who have been in existence for some time may pay rich returns. Understanding the options of restructuring and choosing the best based on the risk/return criteria maybe necessary. Few illustrative aspects of transactional restructuring are:
- Stocking up or keeping low inventory based on rates of product as on last date;
- Strategising the stock transfers to avoid working capital blockage;
- Breaking a composite supply into multiple different supplies- For Ex: Combos with aerated drinks in restaurants, Cinema halls;
- Merging multiple supplies into a composite supply- For Ex: Vaastu, High Rise Premium to be merged with construction;
- Determining whether a transaction to be restructured as a Composite supply or as a Mixed supply;
- Clear breaking up the Price to optimise taxes;
- Revisiting the Discounts policy- Nature of discount, Cash discount or trade discount, whether linked to invoice or not;
- Security Deposits in lieu of advances to ease cash flows;
- Reviewing pricing of all related party vendors to avoid disputes in transaction value- Able to establish arms length; and
- Doing away with the policy of raising Mother Purchase Order’s with supplies over a period of time.
This is just an illustrative list, there can be many more aspects to transactional restructuring, therefore a business needs to understand its various business transactions, identify various options of restructuring and apply/implement the same. The entire exercise could be challenging but benefits could accrue from it.
What if Any Transitional Aspect is not Addressed in GST Laws?
There are certain transitional aspects which are not addressed in the Model GST law. For instance, Provision for removal of inputs for job-work in the Model law does not explicitly cover direct removal to job worker place from vendor locations and also it does not cover direct dispatches of inputs by job-worker to the principals customer after processing. There can be many more such practical scenario’s which model GST law has not envisaged and hence not covered. Therefore, it poses a challenge on the businesses as to treatment for such cases. Ideally, experts view on the same can be taken and accordingly based on the risk involved proper treatment must be given effect to. Further, the same can be intimated to the department for records purpose.
What if Certain Transitional Aspects are Practically Difficult to Implement?
There can be certain transitional aspects which would be more complex in a practical scenario and there may not be only one view of the same. For instance: Determining the quantum of availing credits based on stock or determining the right pricing for goods/services in the GST regime considering the anti-profiteering measures. In such cases, businesses shall face challenge in selecting the right approach. Further, the approach adopted may easily be contradicted by the department. Therefore, in such scenarios businesses must have proper documents, evidences in place and if possible get the same duly certified by the competent authorities to establish its claim.
Updating of Various GST Laws for Each State in a Quick Short Time and Complying with Procedural Aspects of Each State
In embracing a change it becomes crucial for businesses and professionals to stay updated with the change. Government officials are making the laws, revised laws, rules, procedures, formats at good speed. Industry and professionals maybe far behind if law is put in place on April. The revised Model GST Draft has been put up in the public domain on 26th November 2016. Further, upon approval by GST Council, soon each State would come up with its own GST law (to extent allowable) and there set of rules, procedures, etc. One can stay current by having a continuous learning and training system in place. In larger organisations, master trainers must be identified in each department who shall undertake in-depth training of the changes and impart the same downstream.
Determining Right Pricing- Anti-Profiteering
Section 169 of the Model GST law specifically states that in case the Input Tax credit in respect of inputs held in stock is taken then the benefit of the same must be passed on to the buyers. It would be crucial for the businesses to quantify the benefit and determine the commensurate reduction in pricing that would be required to off-set the benefit. The consequences of the decisions taken are in the future. The system should be able to face at the time of departmental audits in the GST regime. Therefore, due care needs to be taken under the guidance of the professionals while dealing with such loosely drafted provisions in the law without clear guidance.
Businesses that do not take care in the initial period would face disputes/demands after 3-4 years of frustration during audit, as they do not have reconciliations, evidence to prove compliance in the transitional phase. Effective GST transition could result in capturing new customers, safeguarding the present market as well as protect the present margin. While it is true that every challenge is an opportunity, in early study and for smooth transition, the saying a stitch in time saves nine is also important.
- GST All Sections, List of all sections of GST
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- Key Changes in the Revised Model GST Law (Nov 2016)
- Important Definitions Under Model GST Law, Decoding of Definitions
- ITC Under GST, Input Tax Credit Under GST, Eligibility & Utilisation of ITC
- E-Commerce Operator & Tax Collection at Source (TCS) Under GST
- Supply Under GST, Composition Levy, Tax Deduction at Source (TDS)
- Time and Place of Supply under Revised Model GST Law
- GST Registration Procedure, Enroll Schedule, Check List GST Enrollment