Explore How GST Will Impact Indian Corporate Tax! This article uncovers the aftermath of Goods and Services Tax on Indian corporate tax legislation. How the Goods and Services Tax has reshaped the tax scenario in India, its implications on compliance, tax structure, and more. Read about companies' challenges along with the advantages of adaptation toward this geological shift in Indian taxation.
Goods and Services Tax (GST) was an integral landmark step in India's tax map. GST was an all-round indirect tax reform, and thus many taxes and levies imposed by the Union and State Governments were erased, making the tax system more streamlined and efficient. Even though the foremost question of GST is indirect taxation, what has been focussed during the implementing process was corporate taxes. Therefore, understanding the impact of this newly set taxation system upon corporate taxes in India is indispensable before entering into the complexities of tax planning and compliance.
This comprehensive guide deals with how GST influences corporate taxes in India, thus helping companies adopt effective corporate tax planning strategies and optimize tax liabilities while enhancing the overall financial efficiency of the company.
If you are looking to reduce compliance burdens or intend to have your tax policies align with the updated regulation, this guide will make clear what exactly is the link between GST and corporate tax planning and management.
Recommended: A Detailed Guide on Global Business Expansion for Indian Companies
The GST is a destination-based tax applied on consumption of goods and services. In 2017, it replaced several indirect taxes like VAT, service tax, and excise duty, amongst many others. GST has streamlined the tax system for corporate sectors, making it clearer, while limiting tax cascading (tax on tax). However, the presentation does affect the corporate taxes. It is mainly on compliance, input tax credit or ITC, and financial planning.
To understand how GST shall impact the corporate taxes, it is vital to understand how GST works and how interrelated it is with the direct taxes like corporate tax. GST is an indirect tax levied on the supply of goods and services whereas corporate tax is a direct tax levied on the profits of the company. The interplay between these two types of taxes can sometimes ease a business firm's tax burden or may cause it to be increased, depending on the tax planning strategies adopted.
Engaging with experts, such as Chartered Accountant firms in Gurgaon, can educate you on exactly how to align GST with the strategy of your corporate tax.
Read More: A Guide to Safe Harbor Rules for Transfer Pricing Compliance in India
One of the primary mechanisms through which GST bears impact on corporate taxes is the ITC mechanism, that is a firm can set off and claim its indirect tax liability by claiming all the tax paid on inputs as ITC. This basically entails that there would be excellent cash flow management for companies in their ability to offset the goods and services tax paid on inputs against the goods and services tax imposed on their sales.
But if the ITC claims are not managed by the business, these could increase tax liabilities. Non-compliance in documentation and non-compliance failures may bring about penalties or deny tax credits, therefore, affecting the corporate tax structure.
Before GST, the Indian tax system was replete with a multitude of indirect taxes levied by both central and state governments. What GST has done is that it has streamlined everything by consolidating all these taxes under one umbrella. Reduced taxes have reduced the overall tax compliance burden on the corporates and made the entire exercise of tax planning much easier.
As far as the pre-GST era is concerned, companies were facing double-taxation issues mainly because of the non-uniform tax system then. GST has helped corporates under a new uniform tax regime much easier to manage and to integrate into their overall tax strategy.
Perhaps the most immediate benefit of GST is the eradication of the cascading tax effect, one of the most crucial implications of GST on corporate taxes. Under the pre-GST regime, value added taxes imposed on goods or services also included the taxes paid during previous stages of production. It was consequently a "tax on tax," increasing the total cost of goods and services and eventually passed through as an increased cost of goods sold.
Under GST, the burden of tax at all the stages of production decreases since it is actually only valued additionally. This means that the cost of productions come down and corporate profit margins improve thereby softening the liability of corporate taxes.
While it certainly streamlined the tax structure, it has also made it much more stringent as far as compliance is involved. There, corporations need to make numerous GST returns and maintain records with high accuracy along with meeting deadlines for payment and submission of returns. If a company fails to comply with rules for GST, then hefty penalties may follow along with affecting the financial health of the company.
They suffer not only under the direct tax but also see changes in their tax calculations on corporate tax. For instance, if the cost of disallowed expenses under the GST regulations increases taxable income, then that will increase liability on corporate tax.
GST also goes a long way in greatly affecting the cash flow of a company since the timing of tax payment may not necessarily tally with the inflow of revenue. For example, businesses are said to pay GST at the time of supply even when the businessperson has not received money from the customer. This creates a situation where companies may run short of working capital.
Proper corporate tax planning is very essential to manage cash flows under GST quite effectively. Companies must ensure that they optimize their input tax credit claims and align their payment cycles with their GST obligations so that undue financial stress does not happen.
Exemptions or incentives accrued under GST law as well as corporate tax laws are available for certain industries and sectors, such as exports and SEZs. Planning in this regard can help corporations reduce their overall tax burden. However, the maze of exemptions demands expertise, hence, it may not be possible but has to approach the tax consultants in Gurgaon to ensure that the compliance is there while still extracting maximum tax benefits.
GST also determines how transfer pricing arrangements are done for companies operating on an international level. Transfer pricing study is a process by which multinational corporations allocate income and expense between a domestic and foreign entity. Introduction of GST has impacted the approach used in structuring transfer pricing policies regarding transaction values and tax credits.
Corporates engaged in international trade, therefore need to search for a GST litigation consultant who may be able to navigate the complex interplay between GST and transfer pricing regulations in such a manner so as to ensure compliance of tax authorities while optimizing their corporate tax strategy.
Through effective corporate tax planning, business houses need to take proactive steps in order to minimize their tax burden under the GST regime.
Proper Documentation and Record-Keeping: Records must be maintained properly so that all the GST-related transactions are duly documented for input tax credit and to avoid penalties.
Time compliance: The corporates need to meet the deadlines for GST filing along with payment schedules, since time compliance saves the penalty that might decrease the corporation tax calculation.
Seeking Professional Advice: Professional advice can be taken by the means of engaging Chartered Accountant firms in Gurgaon, so as to ease the complexity of GST and Corporate Taxes for businesses, maintain compliance, and derive maximum tax benefits.
Leverage Technology: Using automated tax filing and accounting will enable companies to make the system for GST compliance easier regarding transactions monitoring, return filing, and tax payment planning.
Adopting a Holistic Tax Strategy: Corporates must first align their GST practices with the strategy of corporate tax planning followed by the firm. The possibilities of improvement lie in the optimization of available input tax credit claims, effective cash management, and mainly availing exemptions and incentives under the tax laws.
It is seen that GST would have a significant impact on corporate taxes in India as it would alter every aspect of cash flow management to overall tax liability. Although the introduction of GST would simplify its structure and would free it from the cascading tax effect, it would also cause new compliance challenges. A business planning for its corporation tax effectively will eventually optimize tax liabilities by deriving benefits from provisions of both GST and Corporate Tax law.
Companies can work closely with financial experts and take advantage of modern technology to comply with it, and even turn GST into an opportunity to enhance financial efficiency and profitability in the long term.
