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Fear that excise, VAT will be levied on raw material, finished products
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Tuesday, 29 August, 2017, 08 : 00 AM [IST]
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Umesh Kamble and Pradip K Shah
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With India’s long-pending bid to become a single common market finally yielding fruit, the forthcoming GST regime’s impact on tax structures ruling various products and services has started dominating most discussions across businesses including food processing.
Presently the two major taxes in India include Central Excise levied by Central government on manufactured goods and VAT levied by state on all sale and purchase of goods. The other taxes which are levied and are going to be subsumed henceforth include Customs duty at Central level. While at state level, the Octroi/LBT and Entertainment tax will be subsumed. There is one more tax which is levied on the sale and purchase of interstate sales which is commonly known as CST.
CGST, SGST, IGST
The new taxes would be called CGST levied by Central government, SGST levied by state government and IGST, which would replace CST. The IGST would be a sum of the rates of CGST and SGST. Thus all the goods sold would be charged both the taxes - CGST and SGST - and if sold in interstate sales then would be charged with IGST. Thus if for example the CGST rate is 8% and SGST rate is 8% then IGST would be 8%+8%, totalling 16%.
It may be noted that the food processing industry has several exemptions and reduced rates of duties under Excise and VAT. Especially those products which are agriculture produce are specifically kept outside the purview of Excise but are taxed in some states and exempt in some states under VAT. There is a fear that all these raw material and finished products would be now covered under both the tax and taxes would increase.
Agriculture Produce
Dairy farming, poultry farming, stock breeding, mere cutting of wood or grass, gathering of fruit, raising of man-made forest or rearing of seedlings or plants are specifically excluded from the agriculture definition and goods are meant to include, apart from movable property growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under the contract of supply. Thus it is clear that trading in the agriculture produce would also get covered under GST which currently is taxed only under VAT at nil or concessional rate. Also dairy farming and poultry farming are excluded from the definition of agriculture which give indication that milk too may get covered under GST which at present is covered under VAT or CST only. There are all possibilities that these activities which were erstwhile covered under only VAT would face higher tax rate for being covered under both CGST and SGST. About 200 items, like premium tea, ready-to-eat food, branded biscuits can lose the concessional rate of duty in the GST regime, thus making it a bit costly. Further, Central government is planning to reduce the list of exemptions under Excise from 300 items to 90 items.
Impact on Cash Flow
The food industries are having concessional rates of taxes or nil taxes on some of the raw materials. For example, fruits, vegetables, fruit juices, purees and primarily processed goods under both Excise and VAT or at least under the Excise. In order to provide an example, purchase of lime fruit, tomato, beet and so on on which the rate of tax under Excise and VAT is nil. In case of fruit juices, Excise is nil but VAT is 5%. Under GST, these nil rates may not exist and there would be increase of tax, may be by two times, since both CGST and SGT would become applicable. Thus fruit juices, purees may be taxed at 5% plus 5% totalling to 10% (CGST and SGST). These will not have cost impact since the same will be Cenvatable i.e., the input tax credit would be available to be utilised to pay the tax on finished product. But the same would have impact on the cash flow of the firm since initially the higher amount of tax would be required to be paid on raw material.
Agriculture produce also faces the Mandi tax. As of now, there is no clarity whether Mandi tax or APMC would remain or will be subsumed. But Octroi, LBT and Entry tax will no longer be applicable. These may reduce the cost of the raw material to the extent that they would be included in SGST and the same would be available as setoff to pay against the tax on value addition, which is not available as setoff under present system even though the tax rates under GST would be higher.
An example
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Particular
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Present
Tax Structure
Amount
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GST
Tax Structure
Amount
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Purchase
Price
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1000
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1000
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Excise/CGST
10%/12%
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100
(1000x10%)
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120
(1000x12%)
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Sub-Total
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1100
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1120
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VAT/SGST
10%/12%
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110
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120
(1000X12%)
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Sub-Total
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1210
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1240
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Octroi/LBT/Entry
Tax 5%
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61
(1210x5%)
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Nil
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Total
Cost
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1271
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1240
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(-)
Set Off
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Excise/CGST
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(100)
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(120)
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VAT/SGST
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(110)
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(120)
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Net
Cost
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1061
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1000
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Thus there would be reduction of net purchase cost due to abolition/subsumed of Octroi/LBT even if the rate of tax under GST is higher than the current tax rate. The benefit to the wholesaler and distributor would be much more since they would be able to claim setoff of CGST which at present was not available under Excise.
Double Taxation
At present, VAT is also charged on Excise duty, thus there is double taxation. Under the GST, the CGST and SGST would be charged on the same value. To simplify the same, let’s consider an example: say on a finished good priced at present at Rs 1,000, the Excise is say 10% and VAT is 10%. Also say under GST, CGST is 10% and SGST is 10% then the impact of tax could be:
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Particular
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Present
Tax Structure
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GST
Tax Structure
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Amount
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Amount
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Sale
Price
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1,000
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1,000
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Excise
duty/CGST(10%)
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100
(1000X10%)
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100
(1000X10%)
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Subtotal
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1,100
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1,100
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Vat/SGST
(10%)
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110
(1,100X10%)
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100
(1,000X10%)
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Total
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1,210
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1,200
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Thus under GST, the tax on tax will be removed and there would be net reduction of cost of goods.
Further, transportation would become more efficient due to removal of Octroi/LBT/Entry tax barrier which will save lot of time. These indirectly would reduce the lead time for companies and they would be able to reduce the inventory and thereby reduce the inventory carrying cost and working capital requirement. The reduction in time for transportation would also bring down the cost of transportation.
Due to reduction of number of taxes, the complexities of tax laws would reduce and thereby the companies can utilise the manpower more efficiently towards increasing the productivity and thereby create more cost efficiency and increase the profitability of the company.
Apart from above, the cost of various services like telephone, mobile, Internet, and consultations would increase, which would, in general, increase the need for working capital.
For the end-consumer, the tax rates would increase due to total tax rate in some products, since on the same, at present, there is no Excise duty and only about 5% VAT or 2% CST is applicable, but once GST is effective both CGST and SGST would become applicable. For example, tea being considered as garden product/agri product, only VAT at 5/6% or CST at 2% is applicable, similarly in case of milk powder, there is 5% VAT or 2%. Also on coffee beans/seeds, there is VAT of 5% but no Excise. All these products which at present are considered to be agri produced and not covered under Excise would get covered and taxed under CGST. Thus could increase the cost for consumers.
The Challenges of GST
GST would need robust software which would be able to create reports required to be uploaded in timely manner. Unlike the earlier tax reforms, in GST, probably the government machinery is more equipped and ready to take up the challenges of the countrywide one tax system. There would be need for real-time uploading of transactions entered by the company with the detailed information of each transaction. The challenge would be to enter the data without any error and omission. If the error occurs in uploading of data, in consequence it would affect the tax credit and tax liability. Government also has incorporated compliance rating and if the rating of the company falls below the grade then the company may be penalised. The accounting staff would be required to be trained for filling the required details correctly and on real-time basis. There are also apprehensions that the number of returns to be filed would increase drastically.
Way Forward to Overcome the Challenges
The industry will have to first understand the working of GST. It will then need to understand the gaps in its present system. For example, if every transaction needs to be entered in the return and statements to be submitted then what changes would be required in the present accounting or financial softwares like ERP and SAP or accounting softwares like Tally or TFAT. It will be key to train the accounting staff with the help of tax consultants and experts in the field of GST/ Indirect taxes and software vendors.
Apart from the accounting staff, even the purchase department of the company would be required to be trained to effectively bring down the costs of purchases by considering not just the tax aspect but also the cost of transport and lead time of procuring.
(Shah is a chartered accountant and Kamble is chief executive officer, Farm To Fork Solutions India Pvt Ltd, Mumbai. They can be reached at pshah123@gmail.com, umeshretail@gmail.com and umesh@farmtoforkindia.com.)
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