Channel Welcomes Tax Reform

The tax structure in India has always been a gray area for channel partners.
Multiple taxes at multiple entry levels have not only got the channel confused,
but as witnessed in the recent past, also hindered many of their businesses.

During the recent Budget announcement, Finance Minister Pranab Mukherjee
proposed ushering in of Goods and Services Tax (GST) by April 2010. This also
happens to be one of the points that P Chidambaram, ex-Finance Minister had
mentioned when he had announced the budget in 2006 and 2007. Finally, some
movement can be seen on the proposal. Unfortunately, lack of information on the
topic has got people guessing regarding the nature of the tax system. One also
needs to keep in mind that if and when GST comes into being, businesses will
require a buffer period to get their systems and records ready for it.

What is GST?

There are two types of GST-unified and dual. In the first model, central excise
duty, service tax and sales tax are merged together and collected as one single
tax. In dual GST, two kinds of taxes are applied on the taxable value of a
product or service-central goods and services tax (CGST) and state goods and
services tax (SGST). While no concrete plans have been announced on the nature
of GST that will be applicable in India, in all probability it will be the dual
system. This ensures that both the central and state governments have control
over their fiscal powers.

The first country to adopt GST was France back in 1954. Today, about 140
countries have adopted this system.

GST is essentially a value-added tax that is applicable on goods and
services. Once this comes into place all the other taxes will be done away with,
such as central tax, state-level sales tax and octroi. Not only will the
initiative break the tax barrier that currently exists between the different
states in the country, it will also make the tax procedure transparent since it
will be collected at the point of sales and not at multiple points. The channel
partner is responsible for collecting the tax from end-consumers and handing
over the GST to the government.

Weighing the odds

While currently a channel partner pays an average of over 20 percent tax,
once GST comes into play the total tax they will have to pay will reduce by a
significant margin. Additionally, the confusion over double tax that many
software dealers are currently facing will also disappear.

“The introduction of GST will be good for the channel. It will plug loopholes
present in VAT and other taxes,” shared Arvind Modi of Jaipur-based Bits&Bytes.
But he also reflected that the system might encourage dealers to make their bulk
purchases from the metros. “As of now we buy our goods locally from the sub-disti.
But with GST, cross-border purchases might be encouraged. With dealers in metros
giving better prices, channels in smaller cities will prefer to buy from the
metros,” added Modi.

When asked what he thought about the introduction of GST, Modi replied, “It
is not a big issue and we will follow it if it's implemented. It all depends on
whether the government is geared to implement it or not.” He added that as of
now, it was too early to understand the modalities.

On the other hand, PN Prasad of Puducherry-based Microplus Computers, who is
also the President of Confed-ITA felt that GST would herald good tidings for the
channel. “At present, I am limited to Puducherry for goods that I want to
purchase. With GST we can take our trade interstate and increase it. I can get
competitive with big orders, so this system will be good for players who are
looking to expand their reach,” commented Prasad.

Agreeing with Prasad was Sanjay Langer of AGM Sales Corp, Jammu who saw the
idea as an opportunity for the channel, as interstate purchasing would become
easier. He also foresaw that the large national level distis would consider
closing down their warehouses in the region. This way billing can be done
locally. Listing the negatives in the same breath he said, “Four to five distis
will end up offering the same products and there will also be the time factor in
transporting the goods. But pros and cons are part and parcel of a business.”

According to Chetan Shah of Mumbai-based Xpress Computers, the GST system is
a welcome and long-awaited tax reform. “The current system of computing a
plethora of different taxes payable such as CTS, VAT, octroi, customs duty,
excise, etc. is both cumbersome and costly. The impact of the proposed changes
will surely be positive on the channel,” he said. Citing that prices may go up
in some cases, Shah added, “GST will be rebatable at source paid, so it might
not translate into an increase in prices. In fact, net prices to buyers might be
lower than before because of tax credit.”

Readying for change

The proposed date for GST to come into effect is April 2010. Yet there are
many unanswered questions on whether it will finally be implemented, and if so
what will be the nature and rate. There is a lot of backend work that needs to
go into fixing the rate of GST, which is something the central and state
governments have to sit down and finalize.

Speaking about GST and whether it should be introduced or not, Modi shared,
“If it's in the interest of the country, then yes! it should be done. The
government should not think short term. Ultimately, what is good will continue.
Raj IT Forum is willing to organize online seminars on GST if we get experts to
talk on the topic.”

Shah, who felt that India actually needed a unified model stated, “I believe
that a unified GST model is ideal for India as we are a large country. A dual
model would mean complications for the government as well as assesses.” On how
the channel can prepare for the new tax, Shah said, “Firstly they need to
understand the new reforms carefully; have a detailed meeting with their tax
consultants and have doubts clarified, if any; adapt their processes and educate
staff accordingly and finally, enforce the new procedure with due diligence and
care.”

RUTH SAMSON

(ruths@cybermedia.co.in)