GST would be one of the most significant fiscal reforms of independent India. GST is expected to result in major rationalization and simplification of the consumption tax structure at both Centre and State levels. It is expected to replace all indirect taxes, thus avoiding multiple layers of taxation that currently exist in India.
Depending on the final GST base and rate, there will be a significant redistribution of tax across different goods and services. Goods currently subject to both Centre and State taxes should experience a net reduction in tax, with positive impact on consumer demand.
Besides simplifying the current system and lowering the costs of doing business, GST will call for a fundamental redesign of supply chains. It will affect how the companies operate their businesses, presenting significant opportunities for long-term revenue and margin improvement.
For instance, under the current tax structure, supply chains are invariably designed to minimize the burden of
the central sales tax, with distribution centers located in individual States where the consumers are located.
They are sub-optimal from a strategic and economic perspective. The elimination of the central sales tax will
provide an opportunity to optimize supply chains, enabling companies to reevaluate existing procurement
patterns, and distribution and warehousing arrangements.
GST is also expected to result in a reduction in inventory costs. Dealers would be able to claim a credit for the tax paid on their inventories, leading to improved cash flows. A successful implementation of GST is significantly dependent on IT capability – not just at the tax administration level but also at the taxpayer level. Efforts will be required to change existing IT systems for GST enablement which could be complex, challenging and lengthy task for the IT department.
Summary of key business impacts
- Inter-State procurement could prove viable
- This may open opportunities to consolidate suppliers/vendors
- Additional duty/CVD and Special Additional duty components of customs duty to be replaced.
- Changes in tax system could warrant changes in both procurement and distribution arrangements
- Current arrangements for distribution of finished goods may no longer be optimal with the removal of the concept of excise duty on manufacturing
- Current network structure and product flows may need review and possible alteration
- Tax savings resulting from the GST structure would require repricing of products
- Margins or price mark – ups would also need to be re examined
- Removal of the concept of excise duty on manufacturing can result in improvement in cash flow and inventory costs as GST would now be paid at the time of sale/supply rather than at the time or removal of goods from the factory.
System changes and transaction management
- Potential changes to accounting and IT systems in areas of master data, supply chain transactions, system design
- Existing open transactions and balances as on the cut-off date need to be migrated out to ensure smooth transition to GST
- Changes to supply chain reports (e.g., purchase register, sales register, services register), other tax reports and forms (e.g., invoices, purchase orders) need review
- Appropriate measures such as training of employees, compliance under GST, customer education, and tracking of inventory credit are needed to ensure smooth transition to the GST regimed