On the 79th Independence Day of India on 15 August, the prime minister made multiple announcements, including . Though more details have yet to be revealed, this has created a buzz in the industry. Shivam Mehta, executive partner at Lakshmikumaran & Sridharan (LKS) with more than a decade of experience in tax advisory, explains the implications of this development.
Q1. What do the standard and merit tax slabs mean? What are your views on them, their applicability and their effect on businesses?
The merit and standard slabs essentially mean that a … 5% GST rate applies to essential and widely consumed goods in the first category, while 18% GST will cover most of the remaining products in the second, including a large proportion of goods presently covered under the 28% slab, barring few exceptions.
This may have a revenue impact for the government in the beginning, however, the government and businesses, both stand to gain in the long term from increased demand. Though the benefits are foreseeable, it is equally important to navigate hurdles during the transition phase.
Q2. What do the new tax slabs mean for the ease of doing business in India?
With the resolution of GST classification disputes and proposed elimination of the inverted duty structure, businesses are poised to benefit.
That said, since the 12% slab rate will be eliminated and 99% of goods will move to the 5% slab rate, the chances of increased accumulated input tax credits (ITCs) on account of the inverted duty structure cannot be ruled out. It is worth mentioning that some of the products were intentionally placed under the 12% slab to avoid the inverted duty structure. Thus, the shifting of almost all goods to the 5% category must be cautiously approached to avoid the inadvertent introduction of new inversions, which may eventually tie up the working capital of businesses.
Q3. What should CFOs and tax teams immediately review in contracts, vendor agreements, or pricing models to avoid exposure?
With talk of anti-profiteering measures being re-enforced, time is running out. Anti-profiteering provisions require businesses to pass on the rate reduction to the recipient by reducing prices. It is crucial for businesses to formulate strategies to pass on the benefits and shift its focus on the costings, margins, distributor contracts and align distributors so they comply with provisions.
Courts in the past have shown limited merit in cases where benefits were passed on through promotional schemes or increased quantities under section 171 of the . The courts had instead suggested the reduction be applied in the maximum retail price (MRP) as the sole acceptable method of complying with anti-profiteering provisions.
Businesses should now gear up for dealing with revising their pricing structures and the associated practical challenges. The Ministry of Consumer Affairs must also step in to issue a suitable clarification, which was done when similar rate reductions were completed in November 2017.
Q4. Do you see this reform as making India more attractive to foreign investors and multinational corporations (MNCs) from a tax predictability standpoint? Why or why not?
Enhanced consumer demand is likely to make India an appealing market for foreign investors and MNCs. However, the likelihood of businesses being involved in litigations, similar to those witnessed during the introduction of the GST, over the requirement of passing on the benefit to consumers cannot be ruled out.
Additionally, dealers or distributors may encounter challenges with accumulated ITCs due to a reduction in the GST rate on outward supplies as against inward supplies, which would have already been procured at higher tax rates before the rate revision.
If businesses are tied up in anti-profiteering proceedings or are denied refunds, it may hamper the enthusiasm of investors. For businesses to truly benefit, reforms should be rolled out thoughtfully laying down practical measures.
