June 20, 2017
Volume 7 Issue 8
Suppliers Brace for Indian Tax Reform
MUMBAI – India will become a common market after it implements its Goods and Services Tax system in July, and lubricant suppliers anticipate a complex transition process with both pros and cons.
GST, the country’s biggest tax reform since its 1947 independence, is scheduled to roll out on July 1. Instead of the current system in which myriad taxes are levied federally and by each of the 36 individual states and territories, GST represents a single nationwide tax, Ashok Jain, Indian Oil Corp. Ltd.’s finance chief, explained at a recent industry conference. Apart from a customs duty for imports, every transaction – be it for goods, services or both – will only be subject to a combination of a central GST and a state/union territory GST.
Most lubricants will be taxed at a rate of 18 percent under the new regime, although some will face a 28 percent levy.
The GSTs will be applied at product destination, and since existing levies are applied at origin, this will likely spur a change to distribution models. “The paramount word is supply. Every supply will be subjected to GST,” Jain said at the ICIS Indian Base Oils & Lubricants Conference here on April 5. This will allow companies to move from having a number of smaller supply depots in various states to a hub-and-spoke distribution network with large centralized warehouses.
While GST might simplify some aspects of business, Jain noted that it will certainly require suppliers to change the way they operate. “It will have a major impact on our entire thinking – throughout procurement, logistics, administrative, accounting and finance operations.”
For example, most suppliers will have to register in each of the states in which they operate. Some small and medium-sized enterprises will need to be aware of opportunities to qualify for lower tax rates – under a “composition scheme” – if their revenues fall below threshold limits. “If you are manufacturing lubricating oil in the country, the threshold limit for the composition scheme is Rs 50 lakh (Rs 5 million or approximately U.S. $78,000), and the tax rate will be 1 percent of turnover,” Jain said. There’s a similar system for lube traders, taxing 0.5 percent of turnover. Those rates are not available to companies making transactions across state lines.
Every transfer of goods will be subjected to GST, Jain noted. However, the plan’s stated intention is not to tax any part of products or services more than once. For example, base oils will be taxed when sold from refiners or traders to lubricant blenders, but the government does not mean to tax the base oil value again when the finished lubricants are sold – only the additional value that has been added. To accomplish that, GST will be assessed on the full price of transactions – in this case the full price of the finished lubricant – but credits are available for taxes paid previously on any inputs to the product.
In order to qualify for credits, though, suppliers and receivers need to upload matching invoices to the GST network. Jain urged companies to exchange their GST registration number with all suppliers, vendors and customers in order to capitalize on potential credits. Companies cannot claim credits for materials purchased from suppliers that have not registered for GST.
Government officials expect the new tax regime will reduce overall taxation and therefore lower prices for consumers. Anti-profiteering rules were adopted in an effort to keep suppliers from raising prices to soak up all of the savings themselves. The country's revenue secretary, Hasmukh Adhia, has already asked companies to not raise prices until July 1, noting that until then, price hikes could be subject to probes.
The new regime will end the practice of offering tax abatements when suppliers give discounts to customers, which may prompt suppliers to end some discount policies altogether, Jain noted.
GST is generally seen as pro-business, but the changeover may cause headaches as it could initially disrupt the working capital cycle of businesses, according to credit rating agency ICRA Ltd. The country is still awaiting clarification on how existing area-based exemptions and export incentives will be replaced under GST.
Under the new system, exports will be exempt from tax, and expenses incurred in export activities will be refundable to exporters, Jain noted.
Among GST’s many wrinkles, Jain pointed out a few that lube market participants should consider:
- All transactions from one state to another will be subjected to GST, even those made within the same pan-India based organization, such as IOCL;
- Payments of state GST on intra-state transactions will be paid directly to the state government. Until now most taxes have been paid to the central government, which reimburses states for their portion. That will continue to be the case for state taxes on interstate transfers;
- Companies will not be able to claim credits on the cost of materials purchased from suppliers that have not registered with GST;
- Violations of GST’s anti-profiteering clause are subject to judicial investigation.
Some companies are unsure about how they’ll be taxed if they’ve signed work contracts before GST’s effective date for products or services scheduled for supply after that date, Jain said. He noted that those goods are still subject to GST and to credits.
Jain advised companies to overhaul their financial and accounting systems to meet the requirements of preparing multiple individual financial statements for different states and different combinations of federal and state GST levies. Companies need to design their information technology infrastructure in such a way that they are able to handle the mammoth task of filing monthly returns capturing every transaction, he emphasized.
Ravi Chawla, managing director of Mumbai-based Gulf Oil Lubricants India Ltd., believes there may be a little ambiguity regarding GST’s impact on the supply chain. “Its complexity will take some time to get understood fully,” Chawla told Lube Report Asia. “But ultimately, it is a positive thing.”
GST implementation could cause a minor blip for the industry, said Kushal Desai, chairman and managing director of transformer oils and lubes manufacturer Apar Industries Ltd., in Mumbai. “There could be some short-term impacts due to the implementation of GST because it is still unclear how the trade will react in terms of stocking products as the GST takes place,” he said on a conference call with analysts and investors on May 31. The effect could last three to four months, he said, but after that, business should start picking up at a much faster pace.