GST set to free India from complex indirect tax laws

Long years ago, India made a tryst with GST, which was slated to be the biggest tax reform in India since independence. The GST saga has gone through a lot of ups and downs and twists and turns, much like a daily soap opera. But, finally, the time has come for GST to see the light of day.

One of the key watch out areas for a consumer is how GST will impact the prices of consumer goods. In order to control inflation and to ensure that GST does become regressive for the consumer, the government has taken the following two measures.

First, in the GST rate fitment exercise, the government has tried to align GST rates with the current indirect tax effective rates (excise plus VAT/sales tax and other taxes such as octroi duty, entry tax).

GST rates for products of mass consumption such as wheat flour, edible oils, cereals, milk, etc, have been pegged at 5%. For other products such as medicines, fruit juices, pencils ball point pens 12% GST rate has been decided. Products such as hair oils, soaps, toothpaste and kajal sticks have been classified in the 18% bracket. However, the above band fitment principle had exceptions and some items of daily consumption such as shampoos, deodorants, detergents, cosmetic products would attract 28%.

The second measure is introduction of an 'anti-profiteering law', which mandates every company to pass on the benefits of GST to the final consumer by reducing prices. While the mechanics and methodology to implement the anti-profiteering provision is still not designed by the government, it will be interesting to see how consumer goods industry factors the impact of GST on their product pricing.

From a company's point of view, GST is a massive change which has a far-reaching impact on various aspects including prices, business processes, IT systems, supply chain and profitability. Most big consumer goods manufacturers had started their preparations for GST a long time back. However, until April, the GST law was in a fluid stage and most of the aspects including, rates, return formats, invoice formats, input tax credit provisions, valuation, etc have got finalised only in the last two months. There has been a flurry of notifications and circulars in the last 3-4 days from the government and industry is trying its best to catch up with the fast moving pace of the GST implementation countdown. The corporate teams of consumer product manufacturers have been burning the midnight oil to make sure that they are able to issue their first GST invoice on 1 July. This exercise involves making changes in the ERP systems, IT testing of various scenarios, updating GST registration numbers of vendors and customers.

Most of the distributors and retailers in the value chain have joined the race against time only in the last couple of months and they have a lot of catching up to do.

Having said this, no denying the fact that GST is a massive step taken by the government towards bringing unorganised sector in the tax net, remove corruption and reduce black money with the aid of digitisation of records, returns and transactions. GST, over a period, is expected to free India from the complex indirect tax laws and usher in a new era of a rational tax system in line with the international regime and which is conducive to growth and prosperity. GST is expected to remove the distortions and inefficiencies in the current indirect tax system, simplify and pave the way for a higher GDP.

The writer is a tax partner at EY India