The GST is a watershed event for India as it will mark the creation of a single indirect tax system for the entire country. GST will ease the movement of good/services and prevent double taxations across the states. It will benefit the consumers as manufacturing and distribution chains as they now will be able to offset their taxes with the amounts already paid through tax in the value chain. GST will have a far-reaching impact on almost all the aspects of the business operations in the country, for instance, pricing of products and services, supply chain optimization, IT, accounting, and tax compliance systems. GST will be a simplified form of taxation that will achieve the multiple objectives of:
- Lowering tax burden
- Expanding the tax base
- Increasing tax collections
GST and Indian manufacturing
One of the biggest beneficiaries of the reform would be the Indian manufacturing industry which conventionally has been challenged with complex taxation systems and multiple supply chain hurdles in inter-state transactions. GST would bring about an integrated tax structure which will subsume the current multiple indirect taxes like VAT, service tax, excise, entry tax etc. and allow a seamless flow of credits at the central and state level.
In our experience of working with the manufacturers of all sizes, products manufactured in one state, transported through another state and sold in a different state is taxed in a rather complex manner.
Many manufacturing companies have adopted strategies such as having small factories or self-owned warehouses across different states to ensure that goods remain in their own company’s possession when moving from one state to another. However, maintaining these scattered warehouses or facilities adds to operational costs.
How GST will affect the manufacturing?
The new GST regime will act as a catalyst for driving the growth of manufacturing sector. It will have a far-reaching impact on business processes, compelling organizations to rethink & realign production costs, production time, supply chain, compliance, logistics, etc.
Supply Chain: GST will make organizations restructure their supply chains; realign their warehouses and logistics networks. The current warehousing strategies based on arbitrage between VAT rates in different States are likely to change with the advent of GST. Warehousing and logistics decision will be based on economic efficiency such as costs and locational advantages vis-a-vis key customers.
Working capital requirements: The requirement of working capital will increase significantly as intercompany transactions will also now attract taxes. Manufacturing companies may have to strategize their supply management strategies in a manner that minimizes cash flow impact.
Transportation: Reorganized manufacturing plants and warehouses would reduce the primary freight charges. GST would eliminate the existing penalties on interstate sales transactions and facilitate the consolidation of vendors and suppliers.
Reduction in cascading taxes and improved Compliance: As a single tax regime GST will bring predictability and lower operating costs for businesses. It will reduce the overall tax burden with reduction of cascading taxes and allow the cross-utilization of tax credits across the supply chain. GST will demand businesses to set-up compliance mechanism for meeting the requirements.
Reduced cost of Production: The proposed GST will reduce the cascading of taxes and will lead potentially to lower production costs.
Consolidation and Outsourcing: With the increase in availability of organized and efficient players, possibilities of consolidation intensify.
Are you ready for GST?
GST would bring in significant changes to business processes. Depending on the operating geographies, size and sector, the changes would be substantial and may require proactive planning with a time-bound action plan. We have been working closely with leading manufacturers and advising / strategizing and discussing implementation options, as they seek to move quickly and efficiently towards the new regime.
Changes to the IT system which is bedrock of the organization’s operations is likely to be significant and far reaching. Changes in the tax rates in itself is a major event ( from a system’s perspective) as one has to create new tax codes, conditions and update information about products and materials. GST Implementation goes beyond that. There is lies the challenge.
A coordinated effort is needed between tax, IT and other departments to ensure success. Various ERP vendors like SAP are working diligently to provide application updates to enable systems to conform to GST norms. That clearly would help solving one important part of the puzzle. Given the magnitude of change, manufacturers are carefully perusing their business processes, upgrading their systems, digging deep into tax modules and designing new functional modes as they prepare for this change.
Broadly the GST will require businesses to revisit the following areas in their ERP:
- Procurement or Materials Modules
- Sales or Supply Chain Modules
- Financial Management Modules
New GST regime will present numerous opportunities for the manufacturing sector to grow and prosper. Organizations will have to reinvent themselves which mean realigning supply chain, transforming administration and compliance, reforming production and logistics, finding new partners and developing synergies etc. Given the paucity of time, being at the cutting edge of technology could be the only way out to achieve this.
YASH has a large team of technology and tax advisory Subject Matter Experts, who have the needed in-depth understanding to assist and support Indian Manufacturers as they embark on this massive transition, indeed transformation exercise. This is the first in the series of many blogs that our team will be putting together to deliberate and share on the best ways to navigate this change. Signing off for now!
Praveen Bhoomraogari is a senior technology professional – Program Manager and Mihir Turakhia is a Senior Indirect Tax Consultant.