Tax professionals and advisors in India are concerned that the government's proposed changes to the GST rates will increase business uncertainty while also making tax planning procedures more difficult to implement.
After the compensation scheme, which some states have come to rely on, the GST Council is considering whether to adjust the four-tier rate system of 5%, 12%, 18% and 28%.
Increase the 5% rate to 8% while moving a basket of goods to a 3% rate, according to the proposals that have been floated. Furthermore, some believe that the 12% rate should be increased to 18%, while others believe that the 12% and 18% rates should be combined to form a 15% median rate. The highest rate, at 28%, is expected to stay the same.
"The GST rate rationalisation is a concern with uncertainty about what the new GST rates will be, when they will come into effect and how they will impact our businesses," said Mohan Nusetti, senior vice president and head of indirect tax at Lupin India.
Another tax director at a major Indian pharmaceutical company said that, like previous changes, these amendments are likely to cause a lot of confusion because such changes are not always easy to implement.
"For a corporate like ours there are a lot of changes that have to be made in terms of re-pricing our goods in case of these GST changes,," the pharmaceutical tax director said.
Risks and difficulties
In India, corporations appear to be taking a mixed approach to preparing for the coming changes.
Nusetti said his company was preparing for the changes by running in-house GST simulations for their products at various tax rate points to see what impact different percentage changes would have on cashflows, especially given their industry's current inverted tax structure.
According to Vikas Garg, head of indirect tax at Siemens, the majority of the planned changes will affect businesses whose products are subject to lower tax rates such as 5% and 12%, but less so for those paying 18% or 28%.
"All their inventory which is already in the market and priced would have to be changed with appropriate adjustments in their entire supply chain including the distributors and retails," Garg explained. "Often times when there is a downward change in the tax rate such as when 18% becomes 12% or 12% becomes 5% then there is an expectation from the government for the corresponding benefit to be passed on to the ultimate consumer"
A tax director who asked to remain anonymous said that splitting the rates would make dealing with classification more difficult. Also, if the goods and services subject to the 5% rate were divided into two categories, 3 % and 8%, everyone would prefer to be in the lower category.
"So, there would be a lot of classification issues that would come up and the dream of the One India One tax regime would be further diluted," the pharmaceutical tax director explained.
There would also be issues with estimating the amount of inventory needed for goods and services, as well as the additional costs of rate changes, as well as calculating how much lower to price products so that the consumer is compensated and anti-profiteering disputes are avoided.
Technology and the future
Any proposed changes are likely to present businesses with technological challenges.
"Nowadays everything is automated," the tax director of a pharmaceutical company explained, "meaning that you have to make multiple changes in case the product slab is revised." Even a three-percentage-point reduction, from 8% to 5%, will have significant consequences.
Some businesses, on the other hand, have decided to wait and see until the GST Council makes a final announcement.
"Unless there is anything official… we cannot act on it. Otherwise, everything would just be speculation at this time," Garg said.
Amit Gupta, director of tax at Dell, agreed that his company should wait and see "until we see what changes" the government announces.
However, some argue that the government should defer any changes to the GST rate due to the country's inflationary challenges.
Whatever the GST Council decides, it will stoke debate in a country that, like the rest of the world, is grappling with rising inflation and shrinking state government budgets. Companies will suffer the consequences of any announced changes, no matter how minor they are.
By fLEXI tEAM