On Aug. 3, the Indian government, led by Prime Minister Narendra Modi, issued the Constitution (122nd Amendment) Bill, 2014, which implements a destination-based goods and services tax (GST) to be levied by federal and state governments. The GST regime had been considered in various forms for more than a decade, but previous governments had been unsuccessful in passing the measure.
The legislation is a promising step forward by the Indian government. U.S. companies with operations in India previously had to navigate a fragmented system, which put forth significant challenges that potentially deterred investment in India. The bill is considered one of the biggest tax reforms in Indian history, and would subsume most of the multiple indirect tax levies into a uniform tax, eliminating existing weaknesses and bottlenecks in the current indirect tax regime.
For the bill to be enacted, it must be ratified by more than 50% of the states, at which point a GST council would be constituted, with the president’s assent, which would frame the model GST legislation. GST bills eventually will be presented to the parliament and the respective state legislatures. Once these bills are passed by the respective legislatures, the GST shall come into force.
The new law will also have a significant impact on business. From a fiscal point of view:
A uniform tax rate would apply on supplies across the country as opposed to the current practice of different tax rates for different kinds of goods and services.
A valuation mechanism under the current tax regime (treatment of discounts, etc.) would be replaced with a new code for determining the value of supplies.
A higher quantum of credits on procurements would be allowed to be used as opposed to the current practice, where cross-utilization between goods and services is not allowed – leading to a seamless flow of credits across the supply chain.
Special incentives such as sector-specific exemptions, area-based exemptions, etc., are likely to be phased out.
From a cash flow and supply chain point of view:
The change in tax rates and availability of tax credits may impact working capital requirements.
Exemptions currently applicable are likely to be pruned down.
The GST will be made applicable on imports from outside India.
Basic customs duties, however, would still apply on imports.
Procurement decisions will be based more on commercial imperatives than be influenced by taxation.
Procedurally, companies already registered with appropriate tax authorities in India would be migrated to the new system, and fresh registrations would not be required. Moreover, compliance with respect to the filing of returns, issuance and procurement of statutory declaration forms, among other things, will likely be simplified significantly.
IT systems will need to be aligned with compliance requirements under the GST laws. Enterprise resource planning packages operated by the subsidiaries in India will be modified in accordance with the GST so that required reports can be generated.
Generally speaking, the GST is a major tax reform that seeks to replace the current indirect tax regime and impact every segment of the business. Companies should strongly consider undertaking a comprehensive GST study to assess every affected business segment in terms of tax positions, business processes, systems and compliance, and appropriate strategy can be formulated to leverage opportunities, mitigate adverse issues and ensure a smooth transition to a GST regime.
: Grant Thornton India LLP, a member firm within Grant Thornton International Ltd, provided the preceding materials. Grant Thornton India LLP is a member firm affiliated with Grant Thornton LLP, and its views do not necessarily represent those of Grant Thornton LLP.
For additional information on India’s GST or global indirect taxes in general, contact David Sites
at +1 202 861 4104 in the Washington National Tax Office or Adam Raschke
+1 813 204 5178.
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.