Founder & CEO, ClearTax.com
Finance Minister Arun Jaitley on March 27 introduced four bills on the Goods and Services Tax (GST) in the lower house of Parliament, paving the way for the launch of the landmark tax reform.
While the government is aggressive about rolling out the new tax structure by 1st July, the consumer firms are asking for a wider window to prepare themselves for GST. Some of the bigger giants like Nestle and HUL however, have reported that they started hiring indirect tax experts and IT consultants from last year itself to get ready in advance and avoid the glitches.
The question now is; how well prepared are the consumer firms in general for GST rollout?
Let’s understand how the new tax structure will impact this industry, the challenges posed by the change in tax laws, and how the firms can align their operations with GST rules to make the most efficient use of the resources under the new tax regime.
Challenge: Technological Readiness
The consumer goods sector includes companies that are involved in food production, packaged products, clothing, electronics etc. The B2C transactions in this sector run into millions on a per day basis which can be handled only by employing ERPs or business process management software that allow the enterprises to manage business. These software also automate many back office functions related to technology, services & human resources.
When GST goes live, the ERP solutions will need to be updated with the new tax law in terms of rate of taxes, type of tax, invoicing, return filing compliance etc.
The way out: Connect with your ERP/business software service provider and evaluate with the help of tax experts if the same system can be configured to adapt to the changes or an upgraded version is available. There are ERP solutions available in the market that come with 100 % configurable taxation module with which GST can be easily implemented in the ERP solution without any patches and service packs.
Challenge: Compliance burden
Companies will now have to upload three returns every month – by the 10th (details of supplies), 15th (details of purchases) and 20th of the month (details of taxes paid and input credit taken) after a sale happens.
Besides, by the next year end, companies would have to upload annual returns as well, totaling 37 returns each a year.
The compliance requirements for the consumer firms, especially service providers who earlier had to file only two returns – one every six months, is therefore going to increase drastically.
Challenge: Classification of goods and tax rates under GST
GST will consist of a four-tier tax structure of 5, 12, 18 and 28 per cent. The tax rates for the FMCG industry under GST are likely to be similar to the existing tax incidence as indicated by the government, except for a few products consumed by the middle class like soaps and toothpaste that could be taxed at lower tax rates.
The way out: Goods will be given a HSN code, and services will be allotted a SAC code for easier tax computation. The same needs to be quoted in all tax invoices and tax rates will be determined accordingly. HSN mapping will become a crucial component of tax return filing in the coming days, so it is important that businesses opt for systems that can provide HSN mapping to avoid paying/collecting tax at incorrect rates.
Challenge: Supply Chain management function
Presently, the FMCG companies have warehouses in every state to avoid paying a 2 per cent central sales tax (CST) for inter-state sales of goods and the state-imposed entry charges, octroi, and other taxes. These warehouses often operate at below efficiency levels adding to overall operational cost.
The way out: Unlike CST, the integrated GST (IGST) for inter-state sales will be creditable and this will promote inter-state transactions. These firms will not have to set up multiple warehouses anymore; in fact they can consider consolidation of depots and shutting down some distribution centers.
It is high time the consumer firms reevaluate and realign their current operations in line with GST laws and get ready for the nation’s biggest tax reform since the end of the colonial era. With the correct measures, consumer firms should be able to get on board the GST wagon in no It is high time the consumer firms reevaluate and realign their current operations in line with GST laws and get ready for the nation’s biggest tax reform since the end of the colonial era. With the correct measures, consumer firms should be able to get on board the GST wagon in no time, and reap the benefits of a simplified centralised taxation system.