IMA’s recently concluded CEO Strategy Roundtable
in Goa received insightful perspectives on the Goods and Services Tax (GST) from
Chandramowli Srinivasan, Finance Director of SKF and S Subramaniam, CFO of
Titan. Unlike presentations with lots of charts, containing arrows and circles that
are frequently hard to grapple with, our panellists shared their points of view
without visual aids in the simplest possible terms. They looked at challenges
ahead and how the GST story was likely to unfold. At the very basic level, GST would subsume
lots of indirect taxes thereby making life simpler specifically for the
manufacturing sector. However, it is still a policy in the making with new
notifications from tax authorities popping up from time to time. This clearly
complicates ERP systems used by companies to administer their accounting processes,
with new patches being offered by service providers every few days. In a way,
everybody seems to be learning on the job.
The objective
The way I see it, GST has two broad
objectives. First, its intent is to make things easier for industry, although
in the short term whether this will happen is debatable. The second, and
perhaps more significant, is that it should widen the tax net. A number of
smaller businesses, specifically those defined as the ‘informal sector’ have
enjoyed a tax arbitrage and this is no longer likely to remain so. Small suppliers
to large companies will be unable to remain in business unless they are fully
compliant and can provide input tax credit to their customers. It is now
increasingly obvious that the Government, keenly aware that GST was bound to
happen, took the controversial step in November 2016 of scrapping 86% of the
currency in circulation. That would have encouraged small businesses to transcend
into the formal economy. GST would now compel them to do so.
Everybody agrees that while GST has been a
commendable effort, it is not really the big bang reform that might have been
possible. In an ideal world, there should have been one indirect tax at one
rate instead of the complications of central, state and integrated taxes that
the current policy regime comes with. However, GST needed a consensus from 28
states and 7 Union Territories with their own agendas and insecurities. Getting
everyone to agree on a common denominator may have been from any benchmark a
painfully demanding task, inevitably necessitating compromises. Optimists
suggest that in the fullness of time when the current structure has stabilised,
a Government of the future may choose to move in that direction. But for now there
are six tax slabs, which whilst not ideal seek to allocate products at the very
rates that were previously charged. The aim would surely have been to create tax
neutrality with the overriding objective of keeping inflation under check.
Worryingly, the experience of most countries that went through the trauma of
GST implementation was high inflation. This is something that the Government would
wish to avoid at all costs as nothing can be more damaging politically than
price instability.
Suppliers and registrations
One challenge for companies is in the realm
of supplier engagement. Input tax credit can only be accounted for when
suppliers comply and upload their tax returns properly. If they don’t file
returns, customers cannot get the benefit. It seems therefore that the
Government has outsourced tax compliance. A second complication of the GST
structure is the requirement for multiple registrations. These become relevant when
the ‘place of supply’ is different from the location of the customer or the vendor,
which is often the case.
Pricing dilemmas
Another consideration that has been distressing
CFOs is the anti-profiteering clause where a complaint from almost anyone can
trigger investigations and subsequent prosecution. Some of the uncertainty
stems from the fact that pricing strategies used by multi-product companies are
such that one product often subsidises another. Under the new regime, if one
product benefits by way of lower tax incidence the company would normally be
required to reduce its price. Maintaining a higher or even a constant price in
order to cross subsidise another might then require formal justification and
extensive documentation. The same problem would apply to companies that follow
‘lumpy’ or psychological pricing where it is not always feasible to pass on
marginal changes in cost. A common example might be a Rs 10 chewing gum which a
retailer can hardly expect to sell at Rs 9.85. There isn’t clarity yet on how
to make these decisions compliant, but some experts suggest the Government will
take a lenient view. They can hardly afford to botch up on a small issue where
the impact in not considered material. By and large, however, the consensus
seems to be that businesses will avoid price hikes for at least six months to
avoid scrutiny. There have been complaints from the markets
that dealers have refused to carry stock in order to avoid losses. Some
companies have consequently provided guarantees for compensation in order for
business churn to continue.
Previous fiscal sops
Finally, there are misgivings about grandfathering
clauses in the absence of clarity on exemptions. Certain states such as
Uttarakhand, Himachal Pradesh and those in the North East have provided fiscal sops
and no one really knows whether these would be honoured. Most believe that the
central Government will cough up its portion – 58% in most cases – but state
Governments are unlikely to follow. Frankly, with stretched balance sheets, the
states really don’t have the resources anyway. In the final count, GST is a
consumption-based tax and consequently manufacturing states will lose.
The Government intends to set up an
authority to offer advance rulings in order to avoid damages through
mis-judgment at a later date. But this is yet to happen, leaving companies in a
dilemma as to how they should handle grey areas. The next three months are crucial
for they will determine whether the GST portal and the backbone infrastructure
can cope. We should get a better feel by September end. The GST Network
requires an application protocol interface where 35 entities have been given
access. If they function efficiently then reconciliation becomes easy. Getting
the IT backbone right is therefore critical. GST is a brave move and comes with
as much political risk as the demonetisation of currency notes. There is a lot
that can go wrong affecting industry, new investment, tax collections and
economic growth. If it has to work the Government needs to persuade and empower
assessees rather than subjugate. Had it been a simpler tax, the risks would
have proportionately lessened. But the government must surely know this.
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