Business challenges in the implementation of GST
In recent times, India has taken a quantum leap to rebuild itself as a powerful and business-friendly economy. In this quest, India has aptly addressed its primary concerns and pushed its first set of economic reforms. Among the many planned reforms, the Goods and Services Tax (GST) reform will be a stepping stone in restoring the Indian economy.
The enactment of the GST reform is not just another technical revision but is a seminal tax reform, catering to greater transparency, governance, value addition and cost-effectiveness. The new regime will free India of its complex indirect taxation structure and open up an array of opportunities and challenges for the businesses community in India. With its probable implementation from 1 April 2016, the challenge at hand for the business community is to adapt to the transitional shift in the tax reforms, by understanding the very nuances of the proposed GST Bill.
Following our previous GST updates that covered the 122nd Constitutional Amendment Bill (CAB) and reactions of the States and industry to CAB, this update highlights the business challenges involved in the implementation of GST.
Finance and Working Capital Management
Strategic Administration Management
- With the proposed high GST revenue-neutral rate (RNR), cash flows will have to be optimised to provide for the changing indirect tax rates. In addition to the changing rates, GST will have a direct transactional impact affecting the cost of the product and cash flow ultimately (e.g. additional 1% tax on consignment transfers).
- Bottom lines of working capital will have to be reworked. Furthermore, in order to optimise working capital, re-budgeting for working capital loans and bank cash credit limits will have to be commissioned.
- Additionally, foreign investments could also be attracted by leveraging India's recent positive image as a manufacturing destination.
Supply Chain Management and Business Procurements
- As per the proposed Bill, state-specific registration may have to be obtained for supply of goods and services at different locations. This would also lead to forming state-specific committees to comply with provisions related to GST.
- The procedural follow-up of the indirect taxation regime may see a complete change. This may include revised forms being prescribed for registration under GST, payment of taxes, filing returns, audits and assessments.
Product Pricing and Sales Promotion
- Under the present Value Added Tax (VAT) system, businesses opt for multiple warehouses in different states to mitigate the tax incidence of Central Sales Tax (CST). In the new GST structure, Integrated GST (IGST) and an additional tax of 1% on inter-state supply of goods would have to be given due consideration in strategising the distribution chain and warehousing.
- A uniform tax rate across the country may warrant strategic warehouse reengineering in the wake of revised supply and supplier chains. Such warehouse reengineering can remove an extra level of warehousing in the supply chain, resulting in cost benefits.
- An additional 1% tax is proposed to be levied on inter-state procurement, credit of which appears to be inadmissible. The same will have to be given due consideration while determining procurement and supply strategies.
- Various industries such as oil and gas, chemical, hospitality, and telecom will have to re-strategise their supply chain and procurements in view of the proposed exemption and exclusion of petroleum products and 'alcohol for human consumption' from the scope of GST.
Transitional Business Efficiency
- Pricing policies need to be determined in line with the business structure to offer competitive prices to its customers, vis-à-vis the prices being offered by its competition.
- Multinationals will need to formulate different marketing strategies to deal with various product lines and a diverse customer base.
Compliances and Process Evaluation
- Smooth implementation of GST is imperative in order to ensure efficient operations during the nascent stage of the GST regime.
- Transaction with cut-off dates post or near its implementation should be reassessed to avoid any negative impact caused due to the proposed change in tax rates.
- As the routine procedures and tax rates undergo changes, the tax accounting treatment, record-keeping and compliances function will have to be revised accordingly. One needs to holistically understand the scope of GST to incorporate it from an accounting perspective.
Training and Development
- Currently, all invoices and books of accounts across businesses are maintained by either ERP or other accounting systems. Post the implementation of GST, accounting software will have to adhere to changes as per the new regime.
- The process of changing the accounting systems and training personnel will also pose as an inherent challenge to the business.
- GST will introduce new concepts, provisions, rules and regulations. In order to adapt to such changes, organisations will have to devise a customised knowledge assimilation training programme on GST for teams across all levels.
- Organisations enter into long-term contracts both, sales and procurement. Few of the current (and proposed) long-term contracts could extend and stay operational post the implementation of GST. Thus, it is essential for organisations to understand the impact of GST on relevant clauses in long-term contracts.
It is prudent for businesses to prepare themselves for this paradigm shift in the Indian tax structure. It is also advisable that business leaders take an initiative to represent their industries with the Authorities during this early law-making process. This initial engagement will certainly entail a positive dialogue leading to better understanding of the business by the Authorities as well the intention of the law by the industry.
- GST will have both, a direct and indirect impact on every aspect of the organisation such as bad debts, inter-company transfer of goods/assets, current blocked credits, record-keeping, revenue recognition, writing of inventories, salary structures, etc.
- Exemptions and Rebates enjoyed under various indirect taxation Acts could be revoked, leading to changes in product prices and business decisions as a whole.
- Understanding every minute detail of GST and its implication on an organisation, therefore, could turn out to be key differentiator for a business to succeed under the GST regime.
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