GOODS AND SERVICES TAX: A UNIFIED TAX STRUCTURE

AWARENESS AND IMPLICATION IN INDUSTRY

Prepared by Sagar V. Sakariya (2008-10) PGP-IBM

[26/11/2009]

DECLARATION
I, do, hereby declare that this work has been carried out by Mr. Sagar V. Sakariya, PGPIBM2008-10, Ahmedabad Management Association, Ahmedabad (Gujarat) under the guidance and supervision of Dr. P.V.Desai. This report has been carried out as a part of study curriculum and is not submitted anywhere else.

Date: 26/11/2009

Sagar Sakariya

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ACKNOWLEDGEMENT

Hard work and dedication is the key to successful completion of any job and this project is no different. In completing this study, I did my level best correcting my shortcomings to possible extent and I sincerely hope that this report will serve its purpose. I extend my heartiest thanks to all those persons whose willing cooperation led to the timely completion of the project.

I express my sincere gratitude to Dr. P.V.Desai, the Project Guide, for providing his extreme knowledge in making this project successful. His valuable knowledge has provided us great support in making this project. His words of advice helped us a great deal the entire project.

I am also thankful to Rajkot Engineering Association for providing information related to different manufacturing industries.

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Table of contents
Prefatory information…………………………….2/5 Objective of the study……………………………. 6 Introduction……………………………………….7 Methodology……………………………………. ..8 Analysis and Research Findings………………...10 Conclusion……………………………………… 22 Limitations and Recommendation……………… 23 Appendices……………………………………....24 References...…………………………………….. 26

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Executive summary
The proposed introduction of the GST signals the next generation of tax reforms designed to address the barriers to trade and to expand the tax base. The survey was initiated to gauge receptivity of trade and industry to the implementation of GST in April 2010 and analyze the feedback for wider communication, including to the policymakers. The research results demonstrate an almost unanimous consensus that GST will be beneficial to the Indian economy. But the suitability of Dual GST which seems to be the only practical alternative in the short-term is not favoured by a majority of the respondents. In addition, the possibility that initially a few states may not join the GST bandwagon presents as area of concern. Coverage by GST of current multiple levies, uniformity of rates, option to claim refund of excess tax credit and need to introduce binding common directives came out loud and clear. The respondents were divided over extension of GST to products of conspicuous consumption which attract high tax rate or the manner of availability of tax credit on capital goods. The most significant point to note out of the survey, not entirely unexpected, is the view that the appropriate date for GST introduction in April 2010. This clearly point toward perception of lack of preparedness on the part of trade and industry and of the government. It is also interesting to note that • • • Easier compliance Efficient Administration and Increased tax collection

are ranked in that order as critical success factors. Clearly there is a message to the government where the implementation efforts should be aimed at. The results of the survey reveal the expectations, apprehensions and concerns of the trade and industry and provide an insight to the policymakers to address the same for a successful implementation of the GST.

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Objective of the Study
• To know the industry awareness level and their readiness for goods and services tax

• To study implication of GST in industry and their views about introduction of goods and services tax

• To analyze various issues related to GST and industry’s view on it.

• To study the pros and cons arising out of implementation of GST in industry

• To analyze the strategic implication of GST in industry

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Introduction
The proposed implementation of the Goods and Services Tax (GST) in India has generated a significant amount of discussion and debate in the industry. Marking a seachange in the way tax will be levied, the GST, when introduced, will have an impact on businesses, organizations and their operations. Simply put the GST is a comprehensive value added tax on goods and services. It is levied and collected on value addition at each stage of sale or purchase of goods or supply of services with applicable set-offs in respect of the tax paid at previous stages. Ideally, the GST mechanism envisages no distinction between taxable goods and taxable services and they are taxed at a single rate in a supply chain of goods and services till the goods/services reach the consumer. It is basically intended as a tax on final consumption. Indirect taxes in India which include Customs Duty, Central Excise Duty, Service Tax, Value Added Tax (VAT) and Central Sales Tax (CST) constitute a major part of the Government’s exchequer. These indirect taxes have undergone significant changes in the current decade. The changes, which include permitting inter-sectoral credit of taxes paid on goods and services and implementation of VAT across the country, were introduced with the aim of making these taxes more transparent and reducing the cascading effect of taxes at various levels. With the Indian economy set to enter the next phase of globalization and aided by the buoyancy in revenues, the Government believes it to be the right time to introduce more reforms in the structure of indirect taxes. Introducing a unified GST would represent a move to adopting global standards and would tackle the challenge of the multiplicity of taxes imposed in India.
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The introduction of the GST regime is perhaps the single most important tax reform in India. The proposed GST seeks to integrate multiple indirect taxes on goods and services at the State and Central levels, remove the cascading effect of taxes and improve competitiveness of Indian Industry. The proposed GST will be a Dual GST with the Union and State Governments having power to legislate, levy and administer the Central and State GST respectively. It is expected that the two taxes; Central and State GST will operate parallelly and throughout the supply chain. As April 1 2010, which is the proposed date for the introduction of GST draws near, the time has come for the nation at large to gear up for a successful changeover. Considering the nationwide importance of the topic, Deloitte developed ‘The Pre GST Survey 2009’ (the Survey) to engage with industry and trade to seek views from and gauge their reactions relating to the proposed Dual GST model and understand their expectations to make this transition a smooth and less complex affair.

Methodology & Respondents’ Profile
The Survey is designed to capture the views of GST & awareness in the industry. The participants of the Survey represented only manufacturing sector. Geographical distribution of participants was also considered in order to elicit view from all over Rajkot industry. The Survey was administered to businesses, both small and large, to ensure that the sample was truly representative. This web based and personal interview Survey contained multiple sections with questionnaires covering all aspects from basic awareness questions, design to implementation and industry expectations. I received good response from the industry and I managed to cover 20 industries. Industry sectors consist of manufacturing, trading and services. I have collected response of only manufacturing sector of Rajkot. Sampling Design: Convenience sampling • Non probability samples that are unrestricted called convenience sampling
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These are the cheapest and easiest to conduct

Research Design: exploratory study: Qualitative Here I have done the research based on questionnaire and depth interview. Questionnaire Design This Survey contained multiple sections with questionnaires covering all aspects from design to implementation and industry expectations. I use close ended questions in questionnaires. Some questions are designed on the basis of likert 5 scale.

Data collection: Data will be collected from the various primary and secondary sources. Primary sources include data from industry and secondary sources include research paper, articles etc.

Profile of respondents:

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Analysis and Findings (Based on questionnaires): 1.Awareness level in industry
I have contacted around 150 industries (both small and large) through email but response was very poor so I personally contacted them through telephone and I got 20 responses. Only large firms know about Goods and services tax. Small firms don’t have much knowledge about GST. So it shows lack of clarity and lack of initiative from the government.

2. Adoption of GST from 2010

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From the graph 60% of respondent aware that GST will be implemented in 2010. Only large firms have knowledge about implementation. It shows government efforts towards awareness about GST are not good.

3. Awareness about Dual GST (central GST and state GST)

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As government is going to introduce dual GST; one is levied by central and one by state. At the central level excise duty, import duty, service taxes etc. are subsumed in CGST while SGST covers VAT, other local level taxes. Only 60% of respondent are aware of dual GST so if government has to rollout GST in 2010 then government has to make more efforts.

4. Expected comprehensive rate of GST

As Federal and State taxes co-exist in India, one of the key challenges before the Government is to determine the tax base and the tax rates of Central and State GST. Empirical studies have indicated that the present rate of indirect taxes, on a consolidated basis, works out to more than 20% after considering the cascading effect of multiple taxes. Besides, if the present tax exemptions / concessions are proposed to be continued under the GST regime, it would lead to an upward pressure on the tax rate to ensure that tax collections are not adversely affected. As these two aspects i.e. tax base and tax rates are inversely related, the determination of an appropriate threshold assumes importance. Around 70% of the respondent feel that comprehensive rate for GST would be between 14-16%.

5. BENEFITS OF CHANGEOVER TO THE GST (FOR A COMPANY)

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The dual GST is expected to be a simple and transparent tax with one or two CGST and SGST rates. It is expected to result in flexibility in terms of filing of return as company has to file only for one time; transparency in terms of simple tax structure, less transaction cost, another benefit would be avoidance of duplication of tax means removal of the current cascading effect of taxes. Around 60% of the respondents feel that it provide more transparency to the system as well as company. Only 20% of the respondents agree with removal of cascading effect of existing taxes.

6. GOOD STRATEGY TO START PLANNING FOR GST AFTER THE DRAFT GST LAWS ARE ANNOUNCED

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The draft law will clarify finer aspects of GST such as rates, classification and compliance. However, based on the material in the public domain, one can begin with spreading with awareness among various stakeholders within the organization. Experience of VAT implementation suggest that there may not be enough lead time available between the date of announcement of implementation of GST and the actual date of implementation. Around 80% of the respondents feel that it is good strategy to plan in advance. Some of the respondent feel that information related to procedure, design, and structure is not available so how can one start plan in advance.

7. MANNER OF PREPARATION FOR THE TRANSITION TO GST

The Survey results seem to indicate that though many respondents intend to form a core team within the organization, seeking external assistance seems to be at the top of the mind for around 30% of the respondents. Only 20% of the respondents feel that an in house core team would be sufficient for preparation of this transition to GST. But majority of the industry
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prefer to take help of external consultant to understand basic structure of GST and to build team internally within the organization.

8. IMPACT OF GST ON COST/PRICE OF PRODUCT/ SERVICES

Since indirect taxes pervade every area of a company’s business, it is possible that even within an industry segment; the impact could be positive or negative to different businesses depending on the supply chain in the prevailing business model. Besides, the GST would bring relief to various sectors by eliminating ambiguity on matters of double taxations (VAT and service tax) e.g. software development, financial lease, Intellectual Property Rights, telecom products, to name a few. More than 50% of the respondents are not clear on the pricing implications arising from the GST implementation. As the respondents consist only manufacturing industries. They are not clear about impact of GST on cost/price of the product.

9. MAJOR CONSIDERATION FOR THE IMPLEMENTATION OF GST (FOR GOVERNMENT)

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Bringing about an integration of all taxes levied on goods and services in a federal polity with sharp distribution of legislative powers is a Herculean task to say the least. There are multiple ways of collection of taxes, implementation, and IT systems within the state etc. if we see the existing infrastructure for collection and filling, is not good so what do we expect when GST will be implemented? Major consideration will be awareness to tax payers and infrastructure which will play an important role at the time of implementation. Some of the industry feel that government need to train its existing employee as they are not aware about IT system so at the time of implementation of GST what will be expected from the government?

10.DIFFICULTIES IN FINDING RESOURCES RELATED TO GST

We know that GST will be implemented in the year 2010 but yet government is not ready with structure, procedure and forms/formats related to filing of GST. Government has formed some website related to GST but information is not sufficient. Recently it came out with the
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first draft related to GST which has given information related to rates. Around 50% of respondent worry of procedure and forms/formats like elimination of some forms, filing of tax return for one time, advance tax payment etc. 35% respondent feel that government has not taken enough step to educate industries about GST.

11.GST WILL BE BENEFICIAL TO INDIAN ECONOMY

In India, while presenting the budget for the year 2009-10, the Finance Minister indicated that the Dual GST structure will be implemented on April 1, 2010. However, the design of the dual GST, for discussions or otherwise, is yet to be released in public domain. Nevertheless, it has been observed that in a typical Dual GST structure, the Central and the State Governments concurrently levy tax on a common base for supply of goods and services. The respondents’ views were sought whether such a structure will be beneficial to the Indian economy. The Survey results reveal an overwhelming response that the GST will benefit Indian economy. Industry expects that the GST will bring transparency, simplicity, harmonization of tax base, reduction in cascading effect and improved international competitiveness.

12. APRIL 2010 LEAVES INADEQUATE TIME FOR TRADE AND INDUSTRY TO PREPARE FOR GST

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The introduction of the GST in India is perceived as the biggest tax reform in India since independence. Hence, trade and industry need sufficient opportunity to offer their views on the basic frame-work and draft legislations of GST. Besides, the state of preparedness at both ends i.e. Government and the trade & industry, is key to the survival and success of this important tax reform. For adhering to the date of April 2010 for implementation of GST, interalia, timely amendments to the constitution for re-allocating the power to levy taxes among Central and State Governments and consensus of all the State Governments appears critical. Ideally, every entity would like to assess in advance, the impact of GST on its business; more specifically the competitiveness of its product and services. This impact assessment study is also necessary for evaluating GST implications on operations, supply chain as well as upgradation of IT system and registering changes in the tax compliance procedures. The GST implementation envisages significant re-organization of tax administrating authorities of State and Central Governments, providing technical and administrative training to staff and building technically sound IT infrastructure for effective and efficient tax administration. More than 60% respondent feel that April, 2010 leaves inadequate for implementation of GST. If we see draft paper for GST is yet to come out which will give full information related to GST.

13. GOVERNMENT

WILL MOBILISE NECESSARY INFRASTRUCTURE FOR GST ROLLOUT IN 2010

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The GST roll out would require a realignment of resources in Central and State Governments besides investment in IT infrastructure which would be the backbone for a successful implementation of the reform process. The staff needs to be trained, business process and audit manuals need to be in place and a stakeholder awareness campaign needs to be run for garnering support to the GST model. It is not surprising therefore to note that more than 70% of the respondents believe that the Government does not appear to be in a position to mobilize the necessary infrastructure to roll out GST by April 2010.

14.ADMINISTRATIVE BURDERN INTRODUCTION OF GST

ON

ACCOUNT

OF

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GST is viewed as welcome measure not as a administrative burden. Trade seems to feel that GST is a welcome measure with less administrative burden if the administrative framework functions as expected without resulting in a multiplicity of rules and regulations different across the states. More than 50% respondents feel that rollout of GST would not impose any administrative burden.

15.SUITABILITY OF DUAL GST TO INDIA

The trade & industry seems uncertain about the suitability of the Dual GST model. This could be because of the apprehension that division of power to legislate, levy and administer the GST could result in a lack of common framework of law and the resultant complexities. More than 50% of respondents are not in favor of dual GST.
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UNIFORMITY IN TAX

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As Federal and State taxes co-exist in India, one of the key challenges before the Government is to determine the tax base and the tax rates of Central and State GST. Empirical studies have indicated that the present rate of indirect taxes, on a consolidated basis, works out to more than 20% after considering the cascading effect of multiple taxes. Besides, if the present tax exemptions / concessions are proposed to be continued under the GST regime, it would lead to an upward pressure on the tax rate to ensure that tax collections are not adversely affected. As these two aspects i.e. tax base and tax rates are inversely related, the determination of an appropriate threshold assumes importance 94% respondents agree that there should be a uniform rate for all the goods and services except essential goods and services. Different rates could create administrative and compliance hassles and therefore it seems that respondents do not prefer multiple GST rates.

17.

USAGE OF HARMONIZED SYSTEM OF NOMENCLATURE FOR THE PROPOSED GST TARIFF (GST MODEL BASED ON HSN)

Trade has emphatically preferred to have the internationally recognized Harmonized System of Nomenclature (HSN) in place existing model of classification. 90% of the respondents feel that the GST Model Tariff should be based on the HSN.

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18. TAX CREDIT MECHANISM WOULD BE SIMPLER IN GST REGIME

In the present indirect tax system, there are several instances where there is break in the tax credit chain e.g. service taxes paid by retail sector or VAT paid by service provider. Further, there are several restrictions on tax credit availment due to restrictive definitions of capital goods, end-use of input/input-services, negative list of inputs in VAT, etc. One of the objectives of the GST should be to simplify the credit availment and eliminate existing cascading effect of several indirect taxes. Trade and industry across the sectors, geography and size is fairly optimistic about simplicity of tax credit mechanism notwithstanding a lack of clarity on treatment of inter-State supplies.

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Conclusion
In less than six months, India is set to embrace the most significant reform in the indirect tax space. Concurrent taxation of goods and services by both Centre and States call for path breaking changes in the structure of indirect taxes existing hitherto. Preparatory steps include constitutional amendments and consensus building. A design that is acceptable to all, a framework that ensures smooth flow of goods & services and provisions that guard against revenue losses & leakages is a challenging task. Fortunately, there is a will to implement and there will be a way. The direction that the Government is providing and the efforts that the empowered committee of State Finance Ministers is taking are laudable. Slowly but surely the consensus seems to be building and the GST structure including rates seem to have been agreed amongst the states. A joint working group from the centre and the states is expected to make recommendations on the model tax law and statutory changes. Indeed, a fine balance has to be achieved to maintain the fiscal autonomy of the states and yet provide uniformity that such a reform calls for. Adhering to the April 2010 deadline would require the Government to mobilize its infrastructure in an unprecedented way to undertake internal re-organization of roles & responsibilities, develop business processes & Audit manuals, train its resources and most importantly to achieve a degree of IT enabled environment that the checks and balances in GST require. A daunting task but not impossible given the resources at its command or the external assistance that it can seek. For the trade & industry, the screen seems to be finally lifting on the GST mystery. The implications that the new tax will have has not yet been understood but there is a growing awareness of the challenges. A white paper on the GST framework from authoritative sources will enable understanding and a draft legislation will help stimulate projections and implications on costs and prices. But the wait cannot be endless given that GST is at the doorstep. The time has now come for the business to assess impact, define strategies, form core teams and develop technical solutions to meet the challenges.

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Limitations and Recommendations
The research is limited to industries of Rajkot only. More research need to be done and can cover more geographic area. • It contains only manufacturing industry. We can try to cover trading and service industry. • The sample size is very small due to time constraint. If we have large sample size than research would be in-depth and more representative. • The research don’t include information related to inter-state supply, foreign trade policy, multiple levies of tax, essential items, claim refund of excess tax credit.
• 

Massive awareness programme should be done by government and other national level bodies like chamber of commerce, local engineering association etc. so that industry can have clear idea about GST and regular update through website or newsletter Constitutional amendment authorizing state to collect and retain tax on services Taxation of inter-state services and their method of taxation

 GST Code to be made public at least 6-9 months before implementation  All declaration forms (Form F, C) should be abolished  Refunds, if any, should be automatic through system based controls.

Success of the proposed GST structure critically depends on operation of the effective IT system so government need to upgrade IT system

 Training should be given to government employees because some of them still don’t have clear idea about VAT  Companies should do impact analysis, gear up for new tax regime, prepare for the transition phase reengineer business processes

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APPENDICES

QESTIONNAIRE
Goods and Services tax (GST): A UNIFIED TAX STRUCTURE
AWARENESS AND IMPLICATION IN INDUSTRY 1) DO YOU AWARE ABOUT GOODS AND SERVICES TAX? Yes No

2) DO YOU KNOW THAT INDIA WILL ADOPT GST FROM 2010? Yes No

3) DO YOU AWARE THAT THERE WILL BE DUAL GST (CGST AND SGST)? Yes No

4) WHAT IS YOUR OPINION ABOUT RATE (EXPECTED) OF GST? • • • 12-14% 14-16% 15-17%

5) WHAT ARE THE BENEFITS OF CHANGEOVER TO THE GST (FOR A COMPANY)? • • • • Flexibility Transparency Less cost Duplication of tax

6) IS IT A GOOD STRATEGY TO START PLANNING FOR GST AFTER THE DRAFT GST LAWS ARE ANNOUNCED? Yes No

7) MANNER OF PREPARATION FOR THE TRANSITION TO GST
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• • •

Forming a core team internally Seeking assistance of external consultants Both

8) IMPACT OF GST ON COST/PRICE OF PRODUCT/ SERVICES

• Increase • Decrease • Can’t say • Neutral
9) WHAT ARE THE MAJOR CONSIDERATION FOR THE IMPLEMENTATION (FOR GOVERNMENT) OF GST? • • • Infrastructure Training of govt. employee Awareness to tax payers

10) WHAT ARE THE DIFFICULTIES YOU FIND FOR RESOURCES RELATED TO GST? • • • Information is not available No guideline from govt. Procedure and forms/Formats
Questions Strong ly agree 5 Agre e 4 Neithe r agree nor disagr ee 3 Somewh at disagree 2 1 Strong ly disagr ee

11) 12) 13)

14) 15)

GST will be beneficial to Indian economy April 2010 leaves inadequate time for trade and industry to prepare for GST Government will mobilize necessary infrastructure for GST roll out in April 2010 Administrative burden on account of introduction of GST Suitability of Dual GST to India
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16) 17)

18)

Uniformity in tax (one tax) Usage of Harmonized System of Nomenclature for the proposed GST Tariff (GST model based on HSN) The tax credit mechanism would be simpler in GST regime

References
1.Google 2.PWC newsletter 3.ICAI
4.

gstindia.com

5.Business Research Methods: Donald R Cooper and Pamela S Schindler

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