India’s goods and services tax (GST) will come into effect on July 1, 2017. The GST, which represents a single indirect tax regime, is the country’s biggest tax reform since independence, and has been a very long time coming. The tax has several benefits for the Indian economy, which include—but are not limited to—unifying the Indian market and increasing economies of scale.
However, many of these benefits are likely to be diluted by the complexity of the new tax. Instead of being a uniform rate, the GST is comprised of four tax slabs at 5%, 12%, 18%, and 28%. Additionally, under the new regime businesses will need to file tax returns three times a month. Factors like these will limit the benefits of the reform and raise the cost of compliance for businesses.
To simplify what is expected to be a difficult transition, executives should take the following actions urgently:
- The GST is, first and foremost, a change in tax, so companies must ensure that their internal IT and accounting systems are updated to be GST compliant.
- Companies must also ensure that they register with the GST Network (GSTN), the one-stop tax portal where companies will file tax returns. Providing finance teams training to familiarize them with the GSTN is critical as companies will now have to file tax returns three times a month.
- Executive leadership teams should establish a GST task force led by finance personnel. The first GST return filing date is July 10, 2017, so companies won’t have a lot of time to prepare once the new tax takes effect. The GST task force should develop a solid understanding of the different tax rates applicable to the company’s products/services as well as its inputs. It’s also important for the team to analyze the treatment of products that are exempt from tax and those that are not under the purview of the GST (alcohol, petroleum, electricity).
- Companies should ensure all their supply chain partners and vendors are registered on and familiar with the GSTN. This is a crucial step as companies can only claim input tax credits if their supply chain partners have filed tax returns. Providing training for supply chain partners to familiarize them with the GSTN should be a priority for multinationals over the next few weeks.
Given the high costs associated with a mismanaged transition, executives should detail clear timelines for the actions above and monitor their task forces’ progress against these timelines. Once these urgent tasks are handled, executives should then begin evaluating the medium-term implications of the GST, which we will outline in our next blog post.
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