India's rollout of what looks like being a fearsomely complex goods and services tax poses challenging accounting issues for companies and advisers alike
This article was first published in the May 2017 international edition of Accounting and Business magazine.
India’s goods and services tax (GST) regime is set to launch on 1 July, with a slew of complicating features that practitioners will need to be aware of, such as multiple tax rates and a separate law to guarantee minimum revenues to the country’s states. The central government is moving ahead with the plans, even as the country’s US$2 trillion economy recovers from the shock of November’s withdrawal of high-value banknotes. Meanwhile, the actual GST rates to be imposed on specific products are still under discussion.
MS Mani, senior director for indirect tax at Deloitte India in Mumbai, says: ‘Given that there are tens of thousands of different commodities and for each of them a GST rate has to be fixed that all the 29 states agree with, it is a very difficult task.’
In November 2016, the newly formed GST Council, made up of central and state government representatives, decided there would be four different GST tax rates (5%, 12%, 18% and 28%) as well as a zero-rated category. Moreover, alcohol was excluded permanently from GST while petroleum products remain excluded for the first two years. Alcohol and petrol products will continue to be taxed by existing systems, which vary widely across India. Tobacco products, fizzy drinks and luxury goods, including larger cars, will be in the GST net, but will also attract an additional special tax, which may vary per product and will be decided separately.
According to Mani, this complexity has fuelled anxiety among manufacturers as most countries that apply GST have a single standard rate. In Singapore, for instance, GST is charged on non-exempt goods at a uniform 7%. ‘There are companies [in India] that manufacture thousands of different products and need to fix their prices according to the respective rates,’ Mani points out.
Furthermore, service industries are still waiting for guidance on the rates that will apply to them, and it is not certain if there will be one dominant rate for services or a range of rates, as with goods. According to Mani, this decision should not pose such a challenge as there are merely hundreds of categories of services rather than the thousands of categories that exist for goods.
A fine balance
The rationale behind the multiple rates (called ‘tax slabs’ in Indian fiscal jargon) is to maintain a balance between possible revenue losses and inflationary pressures, according to Himanshu Tewari, partner at BMR Advisors, a tax, risk and mergers advice firm in Mumbai. He adds: ‘Most of the mass consumption products are likely to be put into a lower tax slab.’
However, multiple tax rates are likely to create conflict over GST returns, with possible litigation between the regulators and taxpayers, he warns. ‘A product may be considered by an assessee in a particular tax slab, but the administration may feel that it is in a higher slab. Hopefully, in the next five to 10 years as more data is gathered, these tax slabs would start converging to three or even two.’
Although business is hoping for consolidation of multiple rates, the new GST law includes a provision to levy even higher rates – up to 40%. Indian finance minister Arun Jaitley has, however, assured business that this provision is only for contingency in case of unanticipated revenue shortages. ‘The cap rate in the legislation is always put at a higher level to leave a headspace,’ he told journalists in New Delhi on 4 March.
Meanwhile, implementation rolls on. The original deadline for the introduction of GST was 1 April, but in January this was put back to 1 July, providing a short breathing space. Tewari says that with agreement from every state government for the new tax having to be secured by this deadline, the central government has had to yield to demands from states that they have administrative control over GST audits. ‘Apparently, there is also some heartburn in the central GST organisation about the degree of flexibility that has been offered to the states in audit and the administrative machinery.’
These shifts reflect the political struggles going on behind the scenes, with states concerned about losing their financial autonomy if they don’t have an equal say in the implementation of GST, Tewari explains. More importantly, he says, they want to make sure that the introduction of GST does not lead to any fall in their revenues – the tax will replace a complex series of national, state and local levies.
Indeed, as part of the GST rollout, the Indian parliament is expected to pass a GST (Compensation to the States for Loss of Revenue) Bill soon. The bill commits the central government to guaranteeing that it will compensate states for any revenue losses in the first five years of GST operation.
The role of state governments in GST implementation will result in extra tax filings and more accounting. Mani says: ‘They will now have to make state-wise books of accounts, at least up to the trial balance stage, as the tax returns will have to be filed for every state of operations. It is a very critical change that many businesses are dealing with right now.’
Accountants will also have to help businesses in reconciling GST returns with their accounts – work that is not required under the current patchwork of separate sales taxes and fees. Furthermore, tax complexity will be heightened by the fact that GST will come into force during the course of the financial year, which in India begins on 1 April.
The introduction of GST will also have an effect on reported revenues, forcing companies to explain to investors how their new numbers compare with previous years’ accounts, says Sumit Seth, partner and leader at the Indian arm of PwC in Mumbai. For example, under current Indian accounting practice, which is closely linked to International Financial Reporting Standards (IFRS), excise duty is included within revenue and shown separately as an expense, but under the GST system, excise duties will disappear.
In 2016, one year after most larger Indian companies had adopted IFRS-based rules, the revenues of the top 100 companies on India’s National Stock Exchange in Mumbai went up 4%, but that figure will fall back once GST is rolled out.
Shocks in store
Chas Roy-Chowdhury, ACCA’s head of taxation, warns that there could be unintended consequences and nasty surprises for businesses, especially if some tax officials implement the new rules rigidly. ‘It could degenerate into being a serious problem,’ he says. ‘The system could take as long as two years to start operating properly.’
Other challenges posed by switching to GST will include the digitisation and uploading of data onto the newly installed servers of GST Network (GSTN), a corporate entity established in 2013 to provide a shared IT infrastructure and GST-related services to government agencies and taxpayers, and training and consultancy to the tax authorities. This process will pose a particular difficulty to smaller companies and traders who lack the ability and technology to digitise their tax documents, Tewari says.
But many larger companies are better prepared for GST than would have been predicted a year ago. Ironically, the government’s heavily criticised demonetisation of 500 and 1,000-rupee notes may have pushed them into accelerating their GST preparations by forcing them to do money transfers online.
Mani says: ‘It has compelled many businesses to go digital [in their financial transactions] and thereby become more organised.’
Raghavendra Verma, journalist based in New Delhi
"There are tens of thousands of different commodities and for each one a GST rate has to be fixed that all 29 states agree with"