Be Ready Before GST 2.0: Key challenges Indian businesses must navigate

Certain issues are likely to surface as a part of the GST rate reforms.

By Shivam Mehta and Tanya Garg  

With the Independence Day speech of Prime Minister Narendra Modi promising GST reforms, the whole country is eagerly waiting for its Diwali bonanza. This reform package pledges more than just festive cheer by the promise of streamlining slabs, lowering tax rates, quicker refunds and ease of living, ahead of the festival season.

While the reforms seem to be a festive treat for both businesses as well as consumers, it is time that businesses gear up to face the challenges so that none of them miss out on the sweetness of these reforms.

This article highlights certain issues which are likely to surface, as a part of the GST rate reforms.

Will businesses be ready in time?

With the government expected to implement rationalised GST rates before October 2025, businesses are running against time to prepare for such reforms. The question, however, is how businesses will be able to pass on the intended benefits and reduce the MRP, given the limited time. Without clear timelines, it will be hard for businesses to adjust MRPs, decide the extent of reduction, update packaging and stay compliant. If the businesses themselves are unclear about when and which rates will apply, it will be difficult to ensure that the benefit of lower taxes is passed on immediately to the consumers.

It is crucial for the businesses to have a re-look at the pricing, realign cost structure, formulate strategies with the information available so that it does not miss the bus.

Will the customers get GST savings?

With the anti-profiteering provisions put to rest effective 01.04.2025, the law does not mandate businesses to pass on the benefit of reduced tax rates to the consumers. It is clear from the recent press release that the real intent behind the reforms is to benefit the end consumer. It will have to be seen whether the market forces alone would be able to deliver the benefit of tax reduction to consumers or the authorities will have to step in and re-enforce anti profiteering provisions to ensure the benefit reaches the intended consumers.

The consumers may also explore the possibility of CCI stepping in to examine such cases. One could argue that provisions under the Competition Act, such as those relating to abuse of dominant position or resale price maintenance, may have some relevance. However, prima facie, these provisions do not appear to be designed to address such situations and as a result, the question of whether the CCI can play a role in such cases remains uncertain.

Thus, one will have to watch out for the next steps of the government to ensure that the benefit is actually reaching the end consumers.

Accumulated ITC: a barrier?

The reduction in tax rates on existing stock could also lead to a situation of accumulation of ITC (input tax credit) at the end of taxpayers. The key question is whether the taxpayers can claim refund of such ITC as a part of inverted duty structure under Section 54 of CGST Act. While the Circular No. 173/05/2022-GST dated 6-7-2022 specifically denies the refund of inverted duty structure in such cases, it will be interesting to see if any amendments will be made in the Circular to ensure the benefit to consumers. If no such changes are made and refunds are denied, the taxpayers may be forced to absorb the said cost in the value of goods which may defeat the very purpose of the reforms. One will also have to see if there is a recourse available with the taxpayers to challenge the Circular itself.

Revamping promotional schemes

The rate rationalisation could mark a major shift for promotional schemes across industries. Manufacturers who are currently taxed at 5% GST rate often hold back from offering promotional schemes because of the risk of mixed supply since most of the goods attract a higher tax rate (12% or 18%). With more products expected to shift into lower slabs after rationalisation, these businesses could be in a stronger position to revamp their promotion schemes and pass the benefits to customers without the risk.

On the other hand, the taxpayers who are under the 12% bracket, and were willing to absorb a 6% burden by paying higher tax (18%) on the products, may now face a considerably disadvantageous situation as the differential will widen to 13% instead of 6%.

Thus, it is better that the businesses have to re-look at their promotional schemes beforehand so that the required strategies can be formed.

Road ahead

As of now, the clarifications as to how the rate changes and rationalization will take effect is awaited by the businesses. The industry expects prior notice, clear guidelines and a reasonable window for businesses to make the necessary changes. Further, it will be really important to see how far and in what ways, the festive treat is actually given to the consumers.

(Shivam Mehta is Executive Partner and Tanya Garg is Associate Partner at Lakshmikumaran & Sridharan.)

Views are personal and do not represent the stand of this publication.