An overview to GST & its impact on FMCG Companies

M.D.Sudharsan
VP Legal & Secretarial CavinKare Pvt Ltd 12th June, 2010

What is GST? Background of GST? Introduction of IGST Introduction of GST GST Model

What is GST?
A tax reform legislation by a Welfare State; A logical next step for better indirect tax administration; An effort to harmonize and consolidate central and state taxes; A reformative exercise for avoidance of multiple taxation; A march forward towards globalization.

Positive Impact Negative Impact Clarification Required

What is GST? Background of GST? Introduction of IGST Introduction of GST GST Model Positive Impact Negative Impact Clarification Required

Background of GST
CENTRE LEVEL:  A Value Added Tax (MODVAT) for select commodities introduced in March 1986;  The same expanded to all commodities in 2002-03;  It was further expanded to cover Service Tax in 2004-05 However:
CENVAT did not capture entire value chain prior to manufacture; Only selective input credit (sectoral or usage based credits) permitted; Several central taxes not included in overall CENVAT frame work.

What is GST? Background of GST? Introduction of IGST Introduction of GST GST Model Positive Impact Negative Impact Clarification Required

Background of GST
STATE LEVEL:  States had multiple tax laws, multiple rates, cascading taxes and indulged in rate wars;  In an effort to harmonize State Tax Laws, VAT was introduced in April 2005;  Sate VAT brought in uniform floor rates and minimum tax slabs. However:
State VAT did not subsume many local taxes; Did not avoid cascading effect of taxes (like input CENVAT ); Also had tax on Service Component of the Goods as part of VAT

What is GST? Background of GST? Introduction of IGST Introduction of GST GST Model Positive Impact Negative Impact Clarification Required

Learnings on VAT
Tax revenue under VAT regime has nearly doubled in five years. It is estimated that GST may take the GDP up between 0.7 to 1.7 %

What is GST? Background of GST? Introduction of IGST Introduction of GST GST Model Positive Impact Negative Impact Clarification Required

Introduction of Integrated GST

Centre in consultation with States have formulated an Integrated GST Model; The GST to be unified to include both Goods & Services; GST to address lacunas in CENVAT & State VAT Regimes; India to join 150 member country already having GST implemented.

What is GST? Background of GST? Introduction of IGST Introduction of GST GST Model

Introduction of GST
Empowers Centre to levy Tax on Sales; Empowers States to levy Tax on Services & imports; Enables Centre and State to jointly levy Tax on both Goods & Services Centre to levy & administer Inter State GSTs on inter state sales & services; GST shifts chargeability at consumer / user end; Subsumes many Central Acts (Excise, Additional Excise, Excise on Medicinal & Toilet preparations, Service Tax, CVD, SAD, Surcharge and Cess); Subsumes many State Acts ( VAT /Sales Tax, Entertainment Tax, Luxury Tax, Tax on lottery / betting, State Cess & Surcharge, Entry Tax (not in lieu of Octroi); Results in abolition of CST However, Treatment of Purchase Tax is to be addressed Alcoholic Beverages & Petroleum Products continue to suffer ED & VAT; Tobacco products would suffer ED over GST.

Positive Impact Negative Impact Clarification Required

What is GST? Background of GST? Introduction of IGST Introduction of GST GST Model Positive Impact Negative Impact Clarification Required

A Brief on GST Model

A Dual GST Structure introduced CGST & SGST; Centre to levy CGST on all Sale of Goods and Services. States to levy SGST on all Sale of Goods and Services. Centre to enact legislation for CGST & model legislation for SGST. Framework of SGST Acts on definitions, classification, valuation, thresholds, floor rates, number of slabs, taxable events, taxable persons, exemptions etc., to be uniform as far as possible; Administration, enforcement, assessment & audit of CGST by Centre & SGST by States;

What is GST? Background of GST? Introduction of IGST Introduction of GST GST Model Positive Impact Negative Impact Clarification Required

A Brief on GST Model

Input credit on CGST can be adjusted against CGST only Input credit on SGST can be adjusted against SGST only Threshold limit for SGST to be Rs. 10 lacs and CGST Rs. 1.5 Crs; & Appropriate number for Service Tax; Small traders and SSI to have compounding option upto Rs.50 lacs turnover at 0.5% GST; Four indicative rates Low Rate for important goods; Standard Rates for all Goods; Special Rate for Gold and Zero rate on exports.

What is GST? Background of GST?

Positive Impact on FMCG Companies

On FMCG Manufacturing: Availability of input credit on entire distribution chain (including CENVAT, VAT, Service Tax component etc.,) before manufacture to make input cost cheaper. Imported Raw Materials may become cheaper in the absence of CVD, SAD etc., FMCG specific Vexed issue of Tax on Cost Vs MRP (U/s 4 or 4A) of Central Excise Act will come to an end; Harmonious classification of goods will enable avoidance of multiple definitions and classifications by Central Excise and Multiple State VAT Acts; Working Capital may be saved as no periodic outgoes due to multiple taxes. Possibility of reduced Administrative cost due to lesser compliance / lesser number of authorities to be dealt, with reduced resources;

Introduction of IGST Introduction of GST GST Model

Positive Impact Negative Impact Clarification Required

What is GST? Background of GST? Introduction of IGST Introduction of GST GST Model Positive Impact Negative Impact Clarification Required

Positive Impact on FMCG Companies

Availability of e-enabled exchange of data and documents including remitting, adjustment and refunding of taxes would make revolutionary change in compliance. There may not be need to operate many CFAs / Godowns across various States. This may reduce overall distribution cost & save time. Possibility of reduced Litigation cost due to prevalence of lesser number of legislations / authorities and related interpretation issues like classification, valuation, taxability of products / services etc; Availability of adjustment mechanism against input and output GST to release working capital would ease compliance and avoids long wait for refunds.

What is GST? Background of GST? Introduction of IGST Introduction of GST GST Model Positive Impact Negative Impact Clarification Required

Positive Impact on FMCG Companies

Need to deal only with two authorities (CGST and SGST) in entire FMCG value chain making compliance formalities simpler. Electronic document management also reduces human interface and related unethical possibilities. Overall reduction in taxation to make final products cheaper for the consumers. Availability of additional resources due to overall cost saving to increase re-investment into the business.

What is GST? Background of GST? Introduction of IGST Introduction of GST GST Model Positive Impact Negative Impact Clarification Required

Positive Impact on FMCG Companies

On FMCG Selling & Distribution
Enhanced threshold limits at Rs.10 lacs for SGST to encourage Small time traders Threshold limit at Rs.150 lacs to attract CGST to encourage Small Traders and SSI. Enhanced threshold for compounding option at Rs.50 lacs to make compliance by small traders simpler and cheaper. Liability to suffer GST only on value addition coupled with e-enabled input/ output adjustment by traders would leave more cash flow into the small trade.

What is GST? Background of GST? Introduction of IGST Introduction of GST GST Model Positive Impact Negative Impact Clarification Required

Negative Impact on FMCG Companies

In case of alcohol based deodorants / perfumes, the lacunae of inability to adjust input CENVAT under State Excise is not addressed by GST regime; Compliance cost of modification of SAP, introduction of resources to handle electronic handling of CGST, SGST & IGST may increase capital investments; Levy of GST on Stock Transfers would make additional investments locked in the form of GST outgo, to be adjusted only upon actual sale of the goods; Applicability of Central Excise and Sales Tax / VAT on Tobacco, Alcoholic beverage & petroleum products makes survival of excise and VAT regimes. Instead appropriate adjustments / rates to be put in under GST itself for all products and Excise and VAT Acts to be repealed. Non inclusion of Stamp duty under GST mechanism does not address cascading taxes in property transactions

What is GST? Background of GST? Introduction of IGST Introduction of GST GST Model Positive Impact Negative Impact Clarification Required

Negative Impact on FMCG Companies

Recommendation to set model SGST legislation, to be adapted by every State would make multiple legislations and disparities from State to State and from product to product. Like in VAT regime, States would exceed their brief in the form of more slabs and higher rates. On the contrary, there should be single SGST legislation with powers to States to modify by remissions. In the eventuality of surplus / unadjustable SGST / CGST availability, working capital would still be locked; States would not prefer manufacturing FMCG companies whose consumption is not in the home State as SGST is only to the credit of consuming State. Introduction of GST Model without publication of the draft act in full, identifying / indicating the roles of the officials & training all intermediaries across the value chain may result increased chaos.

What is GST? Background of GST? Introduction of IGST Introduction of GST GST Model Positive Impact Negative Impact Clarification Required

Clarifications Required to Assess Impact

No clarity as to whether or not Purchase Tax is to be subsumed under GST; No clarity on how Tax Holiday zone like Uttaranchal etc. would be treated to continue the excise holiday benefits; Also no clarity as to how Sales Tax deferral and exemption benefits given by different States would be maintained seamlessly; No clarity as to how other input credits will be permitted to be availed in case of Excise Exempt commodities / Excise free zone companies; No clarity as to how SEZ and Export Zones products would be treated as regards input credit and sale under DTA;

What is GST? Background of GST? Introduction of IGST Introduction of GST GST Model Positive Impact Negative Impact Clarification Required

Clarifications Required to Assess Impact

Threshold limit for CGST applicability on Service Component is yet to be announced. No clarity as to how transitional credit would be given back / refunded to companies pending change over to GST regime; No clarity as to why Octroi and Municipal Taxes cannot be conveniently clubbed under GST model? IGST appropriation under clearing house mechanism is not clearly spelt out;