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How to do 'GST impact study' of a Small and Medium Enterprise

Nagendra Hegde 
on 24 March 2017

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Background:

The implementation of GST would be a milestone for the Indian economy that is expected to cause overall growth in the long run, subject to few temporary adverse impact on portion of the industry say those who are currently enjoying the tax exemption benefits or service industries whose cost is expected to raise due to increase in rate of tax etc.

The industry has already initiated the cost benefit analysis that may result from GST implementation. At the same time, it would be a great opportunity for the professionals like Chartered Accountants (even other professionals) to provide value added services to their clients by way of conducting qualitative GST impact studies during Pre-implementation stage.

Purpose of conducting a GST impact study:

The name says it all. The assignment called 'GST impact study' would draw the attention of management on exactly how the GST would impact their particular nature of business. Impact would certainly be there on each wing of their operation such as sales, procurement, finance and accounts, marketing and distribution etc, whereas, to what extent GST would impact each of such wings could be ascertained by conducting an impact study.

The other benefits include:

  • Inputs for strategic decisions - Pricing policy, place of operation, procurement decisions, business reconstruction etc.,
  • Impact on cash flows/working capital and profitability,
  • Smooth transition to GST - administrative convenience,
  • Awareness on areas of positive and negative impacts.
  • Awareness on immediate action points - accounting system, vendor management,
  • Easy Procedural compliance - Registrations, returns, payment, refund etc
  • Equipment of human resources ready for GST.

Prerequisites for conducting an Impact study:

Are we ready for GST? - before asking this question to clients, professionals! are we ready for GST!! GST impact study is crucial for any given undertaking as the decisions taken based on impact study report could make or break their business. Professionals must be ready before initiating such assignment in the following aspects:

In-depth understanding of relevant laws:

GST is replacing most of the indirect taxes and the provisions in GST would certainly different from our current understanding of existing laws. It is essential to study and understand the in and out of the model GST law (including IGST law) along with the draft rules and business processes, FAQs, formats, empowered committee report and other relevant publications with regard to GST.

In-depth understanding of the existing laws such as Central Excise, Service tax and relevant VAT laws would be necessary as the impact could not be accurately measured with misunderstanding of current provisions.

Defining the Scope of assignment:

The scope always defines the length and breadth of any assignment in professional like. The GST impact study shall be customized in such a manner that it suits the requirement of the given client.

The impact study shall meet the perspectives at various levels of management. The scope should enable the results that could yield strategic decision making inputs to top management and at the same time it shall also consider the transaction level impact, compliance manual and Standard operating procedure related aspects for middle and lower level management perspective.

Following could be the broad areas to be included in the scope:

  • To create awareness on GST to management and staff
  • Customized application of legal provisions of GST
  • Providing course of actions to prevent negative impact
  • Cenvat credit management - Not availed /ineligible / disputed etc
  • Suggest impact on pricing - impact on costing and impact on customers
  • Guidelines for working capital management - Favourable and adverse impact
  • Agreement vetting, suggesting the possible changes regarding tax clauses etc.

Customized checklist could be prepared considering the relevant aspects to be covered in any given impact study assignment.

Manner of Conducting an impact study:

Basically, it is not an audit. Hence approach in conducting the audit and GST impact study would be totally different. The intention is to measure the impact of relevant aspects of GST on respective business transactions.

Following aspects would improve the quality of the assignment:

  • Obtain data from reliable source. More useful data provides better result
  • Impact to be quantitative and practical to the extent possible
  • Impact should be supported by recommendations and course of action.
  • Assumptions made shall be relevant and reasonable.

The impact study is aimed to cover almost all the critical areas of all the business segments. Here we have listed such aspects to be covered preferably in the same order.

Detailed understanding of the operations:

Scrutiny of financials: Once the operation side is understood, next step is to scrutinise the financials of the company including trial balance, statement of profit or loss and the balance sheet. The financials provide us the better picture of current status of compliance and the possible impact under GST. Related party transactions, major vendor details, major customers, receipts and payment in Forex, profitability, direct and indirect sources of income etc could be identified which would play crucial role in reporting the impact of GST on each of such relevant item.

Impact on Revenue:

  • Supplies without consideration
  • Impact on procurement
  • Impact on Expenditure

Impact on Input tax credits:

It is equally important to analyse the status of input service distributors, conditions, and applicability under GST with change in other provisions relating to registrations and input tax credit.

Impact on Place of supply and Time of Supply
Impact on Valuation

Transitional issues:

Apart from the above, there are many other areas which needs attention like agreement vetting, relevance of warehouses outside state, impact of antiprofiteering clause, FTP benefits, IT/ERP customisation, GST returns etc. The events which is neutral under both regime could be ignored like ineligible credits. Exempted activity under both current tax and GST.

Conclusion:

The GST impact study report shall be prepared considering all the possible areas where the attention of management is needed. The scale of impact study would differ from one entity to another depending on its size, volume and nature of operation. In-depth knowledge in subject and clear cut understanding of the client’s business would yield fantastic result in order to provide optimum value addition along with protection from possible threats when the GST is implemented.

The author can also be reached at nagendra@hiregange.com


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