Seamless integration of GST in your businesset2020
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.
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
Percentages represent proportion of respondents who rated the factor as one of the top 3 expectations
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
Percentages represent proportion of respondents who rated the factor as one of the top 3 concerns
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
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
|1||Transaction classification||Understanding of business processes in GST scenario and classifying transactions as goods or services||Bifurcation of transaction under the following categories:
|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||
|3||Item master||Item codes, categories and pricing to be reconsidered pre GST||
|4||Location codes||All warehouses and setup locations to be registered||
|6||Liability of GST payment||Understand liability of GST payment||
|7||Define stages of business operations||Understand the implication of GST on pre, during and post manufacturing of goods produced and shifted||
|8||Charts of accounts||Based on stages of business operations, changes in charts of accounts should be captured||
|9||Finalize logistics model||Understand balance between tax applicable and cash flow impact of tax||
|10||Define sales policy||Revisiting sales policy post GST including schemes, discounts and returns||
|11||Review contracts||POs and sales contracts compliant with GST||
|12||Customer master||Place of supply needs to be captured post GST as customers will have separate registration for different place of supply||
|13||Review of suppliers||Review of nature of goods, place of supply and contractual terms||
|14||Vendor masters||Updating vendor master||
|15||Filing of returns||Submission of correct and timely 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||
|18||Cost of compliance||SMEs usually file returns on their own to cut costs||
|19||Inventory management||Post July 1st, GST charges for existing inventory may not be fully offset against previously paid taxes||
|20||Technology preparedness||All tax systems and processes will be digitized and moved to online platforms||
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.
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.