GST, A Game Changer

Neeraj Basur, Chief Financial Officer, Blue StarGoods and Services Tax has finally arrived. The most awaited tax reform of Independent India has gone live after plentiful tribulations and travails spanning more than a decade. The scale of this transformation has been enormous. Lot of preparation was required by all the stakeholders to get ready for the transition. The transition itself has been fairly smooth and against most expectations, the disruption was reasonably limited. Most manufacturers took a business shut down for only few days in July to revalue their stocks and determine tax credits that could be carried over to the new regime. The government officials have been agile to support the entire transition with proactive communication and engagement. Neutrality of the tax impact has been ensured, by and large. On the surface, while GST replaces a bunch of Central and State level tax legislations and is intended to simplify tax compliance and administration, its implications would be far reaching on the business environment and the country's economy. This change would impact business strategy and business models in a significant manner. A big game changer indeed.

Logistics and warehousing strategy will undergo significant changes. In the pre GST scenario, the supply chain design was based on the need for tax efficiencies and involved movement of goods from manufacturing plant to multiple warehouses as stock transfers before being moved to the eventual selling markets. This resulted in setting up of large number of smaller warehouses and impacted logistics and transportation costs. Post GST, the supply chain architecture can be redesigned to optimize the number of warehouses required, reduce number of shipments and thereby help achieve greater cost efficiencies. Larger consignment size will change the transportation game since it will become more viable now for the transporters to operate trucks and lorry with higher-tonnage and larger container carrying capacity. Elimination of check posts is already contributing to a reduction in transportation time by almost 30 percent further adding to supply chain efficiencies.
Reduction and rationalization of input costs since the cascading tax effect will get eliminated in the GST regime. In addition, pre GST, the input costs were higher due to non-availability of inter-state VAT set off and CST impact on inter-state purchases. Counter veiling and additional import duties have now got replaced by IGST and input set off can be claimed by importers where earlier this also used to be a part of cost for some businesses. Procurement strategy can be based on strategic decisions on economies of scale rather than the need for proximity of suppliers. Consolidation of supplier base will now become meaningful and enable improved quality parameters since they will operate on larger scale. Organized sector will benefit and the unorganized segments will be under pressure to get aligned with the main stream. Transactional interlinkages between suppliers and recipients will force the entire ecosystem to report their trade transactions seamlessly in order to claim input tax credits. Surge in registrations by around two million within just few days of GST launch is a clear data point indicating expansion of the registered tax payer base. Once the suppliers get registered, ability for tax evasions will get checked.

Expansion of tax payer base should eventually result in higher tax revenues and gradually move towards fewer and lower bands of GST rates, some of which is already visible. Linkage of GST registration number with the Income Tax PAN will enable direct tax authorities to validate the level of revenue and realistic profits declared in the income tax returns. This will also help boost direct tax collections. Operating efficiencies will go up. In the erstwhile regime an army of operating and commercial teams used to perpetually be engaged in the maze of C, F, H, I forms and substantial amount of non-value contributing time was lost in collecting these forms and reconciling them at the time of assessments. Availability of input tax credit for both goods and services means that a significant amount of VAT and service tax burn in the earlier regime will no longer be there and therefore would reduce costs and help profitability and viability of businesses Input tax credit set off on capital goods will encourage businesses to go for capacity enhancement thereby support investments and expansion plans.

Digitization and automation emphasis will help improve transparency of commercial transactions between suppliers and customers. The accounts payable and receivable processes should get automated, digitized and streamlined. Transactional confirmations will happen on a monthly basis and the chances of future disputes will be lower, also reducing avoidable litigation. Since the payments to suppliers need to be made within 180 days of the invoice date in order for input tax credits to be valid, the discipline of releasing payments against supplies will improve helping working capital cycle become more efficient. Transaction velocity should go up once the GST systems settle down and enable scale and business volumes to increase across sectors over time. This should impact employment generation positively over a longer term.

In conclusion, the transition has just started and it will take some time before the dust settles down. The challenges will be humongous and business paradigms will get challenged. However, in a country of the scale and size as India, it is indeed commendable that a transformation of this magnitude has been attempted. This does indicate resilience of the constituents of country's economy and an ability to embrace change.