GST may push cos to rejig, shut units

GST may push cos to rejig, shut units
The Economic Times, January 8, 2010, Page 9

M V Ramsurya, ET Bureau, MUMBAI

Companies with distribution or manufacturing units located across the country to take advantage of the differential tax rates may have to close down some of their subsidiaries and alter business models to minimise initial impact on profitability under the proposed Goods and Services Act.

Most companies—mainly those in the fast moving consumer goods category and in traditional manufacturing sectors—had developed a model of countrywide distribution point system to gain on the different rates prevalent till now. However, with the eventual GST rollout where a uniform tax rate will be levied on both goods and services, such companies will lose out on the advantages of a dispersed presence and might also see an impact on their profitability, say people tracking the implementation of the new tax.

The government has proposed the GST in a bid to simplify indirect tax procedures, broaden the tax base by clubbing services into this uniform tax, and to also minimise the various exemptions earlier being claimed by companies. Firms typically had to work through a maze of multi-level taxes, including central excise, customs countervailing duty, special additional duty, state-level value added tax, central sales tax and service tax. Also, under current tax norms, some states have a zero VAT, while others have differing tax slabs.

"Firms operating in a zero duty (0% VAT) state will be hit if GST brings with it a new tax levy, which will affect sales of existing inventory," said Suresh Surana, chairman of Mumbai-based professional services firm RSM Astute, that is currently advising clients on measures to gear up for the eventual GST rollout. "GST being a major indirect reform, it will have a significant impact on cash flow, working capital and on profitability."

"There is also the need to change the organisation framework," says Vaibhav Manek, co-founder and internal business advisory partner at global accounting firm KNAV. "Entire systems have to be amended such as purchase orders and invoices and sales orders and invoices as well as the accounting systems also. Most companies are not geared for this."

The proposed GST could also likely impact composite contracts in fabrication projects or in construction works, where the prices have been fixed earlier. Cost assumptions in the contract are based on the tax projections and if these are likely to change, it would affect the project cost also, he said.