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Seamless integration of GST in your business

Introduction

With July 1st round the corner, the time is finally here for India to embrace the Goods & Services Tax (GST), one of the largest constitutional amendments since Independence. The Indian Government is determined to implement this ambitious tax reform with immediate effect.

The motivation behind this initiative is to integrate the country into a common market, dissolving economic barriers that create differential tax regimes for similar products and services sold in different states. The country will have three types of GST- namely Central GST, State GST and Integrated GST within the GST credit chain. A range of Central and State taxes such as central excise duty, state VAT, central sales tax amongst others will be subsumed in these three categories.

Now that the wait is finally over, stakeholders are encountering a range of emotions, including those of ambivalence and doubt. Although this move by the Indian Government is a step in the right direction, there is uncertainty around the degree of preparation of relevant stakeholders. There are several unanswered questions with respect to tax slabs, network redesign, system integration, API stabilization, transport documentation, forms/compliances, training etc.

India is not the first of countries to have implemented GST. However, the country’s unique and heterogeneous profile makes our example one of the most comprehensive and challenging cases of GST till date.  For one, India observes more than 3.5 billion transactions and hence the same quantum of invoices that need to be processed per month. More than 70% of production in India is serviced by the SME/MSME sector and hence getting these parties on board and compliant on time is a mammoth task.

Markets are vary of dealing with a temporary commercial freeze during the early stages of GST implementation, attributed to multiple factors such as technology system upgrades and adequate training for authorities and company employees.

One industry that is expected to have a particularly hard time welcoming the new reform is the logistics sector, primarily due to its severe fragmentation. For instance, India has more than 3 million transport vendors. Furthermore, several 3PL logistics companies are expected to restructure their entire supply chain flow, which was predominantly designed to avoid interstate taxes. Post GST implementation, these companies are expected to reposition their warehouses at suitable logistics locations.

Opinion Poll

A survey taken during The Economic Times Supply Chain Management & Logistics Summit amongst logistics industry experts on June 16th 2017 brings out following findings pertaining to GST expectations and concerns:

Key Expectations from GST

Approximately 30% of the survey participants are looking forward to convenience, ease and simplification of processes rather than tax efficiencies, which are more of a long term concern. The survey result participants are excited by the idea of simplification of the process and flexibility of operations.

Chart 1 – Top 3 expectations from GST

gst-chart1

Percentages represent proportion of respondents who rated the factor as one of the top 3 expectations

Concerns

Stakeholders are focused on vendor compliance and process related clarifications. Furthermore, they are concerned about their team’s capability to adhere and adapt to changing circumstances, as well as issues such as API integration and flow of e-way bills.

Chart 2 – Top 3 concerns related to GST

gst-chart2

Percentages represent proportion of respondents who rated the factor as one of the top 3 concerns

Problem Solvers

Stakeholders are relying on improved technology and intensive training to help them overcome immediate teething issues. Companies expect training and IT partners to help in compliance with GST documentation, efficient and accurate tax filing & reconciliation reports and adherence to compliance to enable tax credibility.

Chart 3 – Top 3 initiatives to overcome the challenges

gst-chart3

Percentages represent proportion of respondents who rated the factor as one of the top 3 initiatives

Supply Chain and Logistics Role post GST

Logistics services and park providers are expected to be some of the biggest beneficiaries of GST. The multiple expectations from the logistics sector are driven by two key changes viz. requirement of GST ready infrastructure and a capability to enhance their role in the supply chain. On the infrastructure front, there will be an evolution towards a hub and spoke model for users. Hubs would be designed and located to enable capability to handle multi-industry users including B2C operations, connectivity with alternate modes (rail, road and water) and automation to enable velocity of cargo movement.

Expectations will also be driven by an expansion in the role of the logistics value chain. Logistics will evolve to offer services beyond cargo movement, storage and handling. Several key initiatives will come to fruition such as inventory visibility and analytics and channel support for goods. This includes insourcing of C&F capabilities, channel management and decision support for movement of sales, and finally light processing and value additions along with documentation support.

20 steps to get GST ready

As the date for the GST roll-out is around the corner, it is imperative that we assess our readiness to embrace this change. Following is a 20-step checklist of high level initiatives that companies need to keep in control to ensure smooth transition

  Category Description Details
1 Transaction classification Understanding of business processes in GST scenario and classifying transactions as goods or services Bifurcation of transaction under the following categories:

  • Interstate transactions – applicable for IGST
  • Intra-state transaction where CGST and SGST will be applicable
  Applicability of GST Classification of goods or services within GST Ensure that classification is understood and applicable GST rates are updated in systems and processes
2 Place of provision for goods and services Recognizing provisions applicable for goods and services
  • Provisions differ with location, industry and type of commodity. Identify relevant provision for applicable goods and services
  • Develop harmonized system of nomenclature to ensure classification of goods and services is in accordance with GST
3 Item master Item codes, categories and pricing to be reconsidered pre GST
  • Based on GST classification, companies should re-assess classification on item and category codes
  • Ensure enough time and resources are committed to complete this activity
4 Location codes All warehouses and setup locations to be registered
  • Ensure that all relevant manufacturing, warehousing and service point locations are identified and registered
  • Ensure that all exceptions to processes are revisited and identified all relevant locations
6 Liability of GST payment Understand liability of GST payment
  • Ensure that vendors are GST registered
  • If vendor is exempted from registration, ensure process of reverse charge mechanism is defined and monitoring & control processes for GST payment are updated
  • Importers should formulate the process of GST payment
  • E-commerce sales process should be separately designed to ensure compliance with tax collected at source
7 Define stages of business operations Understand the implication of GST on pre, during and post manufacturing of goods produced and shifted
  • Develop framework to understand tax implication on goods transferred from vendors to manufacturing to warehouse to customers
  • Based on scenario analysis define role of each function to optimize tax payable
8 Charts of accounts Based on stages of business operations, changes in charts of accounts should be captured
  • Ensure that charts of accounts are revisited
  • Companies planning e-tailing option should evaluate changes required post GST in chart of accounts
  • Also, companies with services offered from multiple states need to revisit structure of charts of accounts to make it GST compliant
9 Finalize logistics model Understand balance between tax applicable and cash flow impact of tax
  • Understand tax payable on movement of goods from factory to warehouse (mother and sales)
  • Redefine inventory policy to optimize tax cash flow
10 Define sales policy Revisiting sales policy post GST including schemes, discounts and returns
  • GST would change the competitiveness of various companies in different markets
  • Ensure that the pricing policy has been revisited to understand competitiveness of company and competitors
11 Review contracts POs and sales contracts compliant with GST
  • Revisit POs and sales contracts to make them compliant with GST
  • Make sure that there are enough levers to incentivize and penalize required behavior from vendors and customers
  • Ensure transaction approval mechanism is in place where the items, location of supply, taxes, Terms of Payment etc are approved by both  Supplier and Customer
12 Customer master Place of supply needs to be captured post GST as customers will have separate registration for different place of supply
  • Ensure that mapping between sales process and customer GST registration is conducted
  • Design process to ensure new locations and edits and seamlessly integrated with the existing process
  • Invest enough resources to ensure this compliance for B2C transactions
13 Review of suppliers Review of nature of goods, place of supply and contractual terms
  • Finalize supplier rationalization process
  • Ensure tenure and contractual terms with vendors/suppliers are consistent with vendor rationalization plan post GST
14 Vendor masters Updating vendor master
  • Ensure vendors have collected necessary information including HSN Codes for items
  • If Reverse Charge is to be applied, then ensure mechanism for the same is in place
15 Filing of returns Submission of correct and timely returns
  • Returns for any supply needs to be filed in subsequent month. Returns to be filed monthly, quarterly and annually
  • Ensure team is trained and processes are defined for verifying accuracy of returns
  • Budget for increase in resources to match increase in filing frequency
  • Incomplete returns may be considered as invalid returns
16 Tax masters Create process to capture tax returns and master Ensure entity level and consolidation tax masters are prepared and reconciled at regular intervals
17 Commercial Business Continuity
  • Processes and resources required for compliance
  • Potential slowdown in regular operations and slowdown in sales due to adjustment
  • Ensure Finance/procurement and other relevant divisions must receive 3 Ts (training, tools and technology)
  • Budget the costs required for 3Ts in the first 2 to 3 years
18 Cost of compliance SMEs usually file returns on their own to cut costs
  • Seek assistance from professionals and audit firm to assist in GST compliance
  • Budget for costs associated with professional tax services
19 Inventory management Post July 1st, GST charges for existing inventory may not be fully offset against previously paid taxes
  • Implement plan for smooth and rapid inventory sell-off through sales and discount schemes
  • Ensure all CENVAT payment records pre-GST are maintained and shared with tax authorities
  • Also, ensure stock details pre-GST are recorded and maintained
  • Account for marginal loss of credit
20 Technology preparedness All tax systems and processes will be digitized and moved to online platforms
  • Apply appropriate technology – budget for technology spend
  • Restructure IT systems such as APIs and ERP systems to accommodate GSTNs

 

Preparedness of Logistics Services providers

GST offers a massive opportunity for logistics service providers to enhance their role and improve penetration of organized participants. Logistics companies need to evaluate their preparedness to offer the following:

  • Rationalization of warehouses – User industry is expected to redesign network footprint to optimize logistics costs. Post GST, logistics service providers will be expected to offer integrated warehousing solutions at suitable locations
  • Enhanced transport capacity and efficiency – Upon consolidating warehouses, each warehouse of a logistics company will have a larger geography to cover. Hence this would require more efficient logistics with better investment in the same to ensure timely deliveries and better connectivity. GST implementation will also reduce transit time and therefore improve vehicle utilization
  • Performing logistics activities on behalf of companies – Logistics companies should consider working along with their customers to review outsourcing processes and activities taking into consideration logistics and overhead cost savings. This could include opportunity to replace C&F operations for certain industries
  • E-way bills – Requirement of e-way bills for movement of all goods, along with their limited validity makes the idea cumbersome and likely to slow down the flow of goods. Logistics companies must administer necessary technology to ensure e-way bills are valid, traceable and regularly updated when expired. They must also ensure that e-way bills are easily available against goods during transit.
  • Superior technology – Implementation of GST will inevitably make the logistics industry more competitive as freight times are expected to reduce by 30-40% and freight costs by 20-30%. Logistics companies will require efficient technology to handle their increase in traffic, along with new processes such as managing of E-way bills and catering to larger geographies. Furthermore, improved warehouse management systems (WMS) will be required.
  • Skills training and upgradation – The drastically changing dynamics of logistics companies such as the reinventing of the supply chain, repositioning of warehouses and embracing of technology will require more focused and intensive training. Qualified workers will also need to be prepared to deal with the spike in activity.

 Conclusion

When questioned on the sentiment regarding long term impact of GST, concerned stakeholders are optimistic as they look forward to a range of benefits. Firstly, boost in investment will be achieved by lower tax rates through successful elimination of the cascading effect. This will subsequently lead to improved resource allocation. GST will also integrate the Indian market and promote economic efficiency by taxing final consumption as opposed to intermediate goods. Moreover, the intricacies of GST will undoubtedly deter tax evasion, as culprits will lose out on the benefits of input credit. This is merely a glimpse of the numerous advantages that Indian businesses can expect.

In theory, the net outcome of this well intentioned tax reform is promising; however the nation has a long way to go before any of the imminent benefits come to fruition. A joint effort will be required by the Government and the industry to deal with on-the-ground realties. Authorities will have to make a conscious effort to engage with the industry and assist them through this transition.  Companies will need to cooperate in actively embracing new policies. The world is watching us. Good things take time, and India will need to be patient.

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