Thirteen Reasons Why - Part 1

One of the side effects of working with a company whose operations revolve around the forthcoming Goods and Services Tax is that the subject never leaves your mind. Whether it is a dinner conversation about how a certain lady swatted her husband’s hand away or a serious conversation about the recently concluded IPL series, I can manage to steer the conversation back to the tax reform. Gone is the naïve, starry-eyed wordsmith who dreamt of bleeding poetic marvels on paper. What remains is a mature and insightful writer who is so well-versed with GST that she could finally get through the second level of CA exams – once the tax syllabus is changed of course.

If such is the impact on an unsuspecting, incidental victim of GST, have you ever wondered what a change in the tax system could mean for your business? We at GST Edge firmly believe that knowledge should be shared and so we bring you thirteen reasons why entrepreneurs need to do their research.

 

  • Working Capital Management: Working capital is business capital used in day-to-day trading operations. Word in the tax circle is that working capital flow will be disrupted in the initial few months of GST. Transfer of stock from one branch to another will henceforth be counted as a service, thereby making it taxable. GST has been pegged as the system that merges the different taxes consequently saving money for everyone. News flash: that’s not bound to happen. Service tax for some services was lower than the rates that have been decided under GST. This will result in more outflow in the form of tax which shall lead to reduced working capital. To combat this, companies should get an estimate about how much working capital will be required for day to day activities under the new tax structure. This will ensure that their business runs smoothly.

 

  • Logistics: Let’s face it – everyone loves money and to part with it is like a mother parting with her new born. Okay fine, that’s an exaggeration but people certainly don’t like paying taxes. The logistics sector is largely unorganized in nature and this sector manages to keep the prices lower by avoiding taxes. Evading taxes for such companies is going to become difficult if they want to avail tax credit. However, the future doesn’t look too bright for the companies that are listed on the stock market either. VRL logistics and Chartered Logistics are two of the few companies that don’t show any strong upward movement. Logistics cost generally includes transport costs, warehousing costs, management consultancy cost and supply chain facility cost. Since there will be bigger and fewer warehouses, the costs for storing goods will go down. But the downside to this could be that e-way bill generation for all supplies above ₹ 50,000 will lead to a rise in compliance cost. There’s so much happening in this sector itself, it is highly advisable to assess GST impact on priority.

 

  • Accounting and Financing:Currently, accounting treatment of various indirect taxes is based on their nature and point of levy. However, GST is a destination-based tax, which is levied at the point of supply.Areas like reconciliation, tax credit, accounting of tax holiday incentives, updating of accounts charts will change. One major impact GST will have is on treatment of tax credit in accounting books. Organizations cannot avail tax credit for indirect taxes such as luxury tax. Majority of these will be subsumed under GST and will therefore be eligible for tax credit. Refundable taxes are not considered as a part of the purchase cost. After 1st July, companies will have to reconfigure their inventory valuation to ensure appropriate accounting of the taxes. GST payments and returns are going to be state wise. Companies will have to make a proper system to ensure timely and periodic reconciliations. Apart from this, companies enjoy tax holiday incentives from the government. The treatment of these holidays under GST remains unknown, leading to floating implications and possibly pending reconfigurations.

 

  • Sales: The Council sure took its own sweet time to reveal the rates and the classification of goods and services under the various tax slabs. Rates for 1211 items excluding gold were announced after the 14th meeting at Srinagar. Items that are used on a daily basis such as toothpaste and hair oil will be taxed at 18% whereas shampoos, chocolates and instant coffee will be taxed at 28%. Luxury cars like BMW, Mercedes and Audi are going to be taxed at 28% besides a maximum cess of 15% which will bring up the total tax rate to 43%. A basic understand of math tells me that this rate on luxury cars is much lower than the currently effective 52-55%. BMW India is taking this opportunity to showcase their big heart. They are effectively dropping its car prices by upto 12%. Ain’t it a steal? The council has tried its best to minimize rate shocks. Nevertheless, the rates are bound to have an impact on the sales at least for the first few months of GST implementation.

 

This is turning out to be longer than I intended. Come back for more, won’t you?