The Time Cometh Soon Enough

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The Time Cometh Soon Enough

If all goes well, then the most revolutionary taxation regime – Goods & Services Tax (GST) would be implemented by April 2017. These are really exciting times for the Indian economy and companies who are planning to explore & expand in the Indian market full of opportunities. The industry is eagerly awaiting the implementation of GST as it is bound to simplify doing business in India to a large extent in addition to removing inter-state trade barriers and make India a single market. But for this to happen in sanctity, the supply chain network needs to be recalibrated and the companies need to prepare well for D-Day to harness potential benefits and move up the growth ladder. This roundtable with industry analysts would offer you direction towards seamless transformation to be GST READY!

What’s the sense of the market on the implication of GST on the Indian economy?

Varun Bhat, Frost & Sullivan

Varun Bhat, Senior Consultant, Transportation & Logistics Practice, Frost & Sullivan: There is no doubt in the market that, implementation of GST would be one of the biggest reforms in the recent history. Ever since the announcement of GST, lot of noise was generated. However, the overwhelming share of the noise is towards the positive change and benefits that would accrue to the Indian economy in the long run. The current indirect taxation structure is one of the major impediments to the country’s economic growth and competitiveness. By simplifying the taxation structure, GST is expected to significantly enhance India’s GDP and widen the tax base. Businesses expect benefits from streamlined and rationalized distribution. Mass market, consumer-oriented industries, with extensive and deep supply chain are likely to have a high impact of GST.

Suneel Aiyar, Worxogo

Suneel Aiyar, Partner (gSupplier & gIM),Worxogo: GST would boost India’s GDP growth by 1 – 2 per cent. GST will mobilize revenue and reduce the fiscal deficit. It is going to impact all sections of the society – from small time businessmen to huge conglomerates and from a developing state to a developed state in this country. The implementation of GST will give a boost to the growth engine pursued by the government.

Manish Panchal, TSMG

Manish Panchal, Senior Practice Head – Chemicals & SCM Practice, TATA Strategic Management Group: The industry is eagerly awaiting the implementation of GST as it is bound to simplify doing business in India to a large extent in addition to removing inter-state trade barriers and make India a single market. It is going to benefit producers and consumers in the long run by providing opportunities for serving consumer needs better while reducing costs for producers.

What are the challenges on the way to progress?

Varun Bhat: In a federal structure as in India, any landmark and transformational change is fraught with multiple challenges. Forming consensus on the tax rate and implementation mechanisms between the Central and State Governments, mechanism of sharing the tax revenue, dispute resolution mechanisms are some of the few challenges that need to be overcome from the administration standpoint. From the market standpoint, businesses have to essentially absorb a behavioral change. Challenges would emerge in adapting to the GST norms, re-examining the entire supply chain and rapidly aligning to it, identifying any areas of adverse impact and developing contingency mechanisms.

Suneel Aiyar: Revenue Neutral Rate could have an adverse impact, if it is unduly higher than the present tax structure. The threshold limit of turnover for dealers under GST is another bone of contention, aiming to broaden the tax base under GST. Robust IT backbone connecting all state governments, trade and industry, banks and other stakeholders on a real-time basis is a must. The tax administration staff will have to ‘learn, unlearn, and relearn’ the GST not only in letter but in spirit too.

Manish Panchal: The immediate challenge for companies is the race against time. If the GST is implemented as per the government’s target date of 1st Apr, 2017 the companies only have ~4 months to understand the impact of GST on their business and get the systems and processes in place in order to be GST compliant by the deadline. Next, they will need to have a comprehensive assessment of their entire supply chain in order to understand where opportunities lie for reducing costs and improving efficiencies. Here I feel that companies which are pro-active in grabbing this opportunity to improve their operations will create sustainable advantages in the highly competitive markets.

As far as supply chain is concerned, lot many firms are unison on the fact that GST is going to transform the way they operate business. Your critical remarks on the same.

Varun Bhat: Operationally, supply chain would be one of the functions that would be fundamentally impacted. The current taxation regime had a significant impact on the network structure of the supply chain, which would have otherwise been left to be completely based on supply chain considerations alone. Under GST regime, which follows a destination principle of taxation and which aims to enable a free flow of goods and services, the supply chain network would need to be recalibrated. Although the degree of impact would depend on the nature of the industry, overall the decisions that business would have to take to realign their network would be more based on supply chain considerations than taxation considerations. From an operations standpoint, for example, truck idle time at borders and checkpoints is expected to come down, which would lower the logistics costs and help better match supply and demand.

Manish Panchal: The main benefit of GST will be in reducing the logistics and distribution costs along with improved responsiveness that can be achieved by realigning existing networks for economies of scale. Apart from it, credit offsets which are not currently possible such as CST paid for raw materials which cannot be offset towards the VAT liability will be possible in the GST regime, resulting in lower tax liabilities on the products.

What are the opportunities that GST is going to offer companies going ahead?

Varun Bhat: The opportunities and its size would depend on the nature of the industry. In GST, the tax base would shift from production to consumption. One of the biggest opportunities is going to be in terms of product and service pricing. As the costing of products & services will change with GST, pricing is expected to become more competitive & transparent.

The prevailing tax structure forced manufacturing companies to invest in multiple assets, such as warehouses, for product distribution in multiple states. GST provides an opportunity to re-look at this model and consolidate the supply and distribution base or move into an asset light model based on business considerations. GST would also provide a significant opportunity for businesses to warrant a modification and upgradation of their IT systems in order to ensure information captured is in line with the requirements under GST.

Manish Panchal: GST will create a seamless market for companies for doing business in India. Apart from removing the artificial barriers created by tax regulations, GST will also level the playing field between large and small companies while accessing far off markets. Companies can also benefit from simplification of their supply chains through aggregation to enjoy the benefits of economies of scale.

How companies can streamline their supply chain to harness benefits post GST era?

Varun Bhat: From a supply chain perspective, companies will have to reassess and recalibrate multiple aspects of their supply chain strategy, policy and operations parameters. Product flows would have to be streamlined from raw material, to work-in-progress (WIP) to finished goods. This may necessitate change in their current network structure.

Existing policies towards suppliers and distributors in terms of contractual norms may need to be renegotiated. Operationally, process and systems will have to be designed and implemented to conform to the rules of GST. To accomplish such measures, companies should create a project management organization (PMO) with a given mandate to identify areas of specific change, design new process and systems, and monitor the implementation along with change management within the organization.

Suneel Aiyar: The usual narrative for transformation is centred around gains in supply chain efficiencies. I believe, there are several ways in which transformation could possibly happen. Firstly, with reduction in number of layers in supply chain, and more incidences of direct deliveries to customers / channel partners, the information float in supply chain will come down drastically. Supply chains will become more integrated and differentiated, specifically catering to customer requirements. Secondly there would be significant cash released from supply chain pipelines, thereby improving the liquidity in the economy and enhancing shareholder value. Changes in supply chain configuration and footprint will offer tremendous opportunities for logistics service providers. Manufacturers may alter the sourcing footprint beyond state, offering smaller suppliers, typically in MSME, access to more customers. Organizations need to plan their cash flows better as the move happens from exemption based tax structure to refund based tax regime.

Manish Panchal: Realigning the firms’ supply chain away from the current practice of maintaining state-wise warehouses to larger regional warehouses to take advantage of economies of scale will directly help in reducing cost on transportation, warehousing and inventory holding by 5-8 per cent, 10-12 per cent and up to 25 per cent respectively for each of the cost heads, leading to an overall savings in the range of 10-12 per cent of the total logistics cost. For example, a company having multiple CFAs in Northern states can look at consolidating its network and having a regional hub to serve different markets. This is possible mainly because of the easier accessibility to key consumer clusters from a central warehouse (in most cases, the transit times are less than 12hrs).

What are the infrastructural changes required for getting benefits on supply chain?

Varun Bhat: Infrastructure, both physical and digital, is an enabling pillar for trade. With GST enabling free flow of goods & services across borders, infrastructure development would also need to compliment and keep up with the pace of GST adoption in India. Taking an example of freight transportation, in India majority of the freight movement is skewed in favor of road transportation. Today, the national highways constitute to only 2% of the total road network, but carry about 40% of the road traffic. Coupled to this aspect is the poor quality and maintenance of roads that lead to accidents and equipment breakdowns, further adding to the delay and ultimately costs. If the objective of free flow as envisaged in the post GST scenario has to be met, then the investments in growing and developing physical infrastructure that enable multimodal flow of goods across India has to be scaled up.

On the digital infrastructure front, government as well as companies will have to invest in robust IT systems and tools that would reflect and be tuned to the post GST scenario. The government has already initiated work on the technology backbone for introducing GST. Companies will need to initiate work on readying their digital infrastructure for incorporating changes in master data, transactions, compliance and reporting to name a few.

Suneel Aiyar: Transportation network modes could change as layers reduce the haul distance increases. There could be a shift towards rail and multimodal transportation. More cross-dock points will emerge and all this would result in an increase in containerization and palletization. There will be more accent on scale & automation, as well as verticalization in supply chains. We could also see emergence of business models with similar level of collaboration and sophistication as seen by shared services. With greater visibility and collaboration between customers and service providers, we could see a shift in model of service providers from aggregator and asset light to an asset optimal player.

Manish Panchal: Companies would have to take an integrated approach towards planning for GST and implementing the necessary changes before the implementation deadline in order to ensure business continuity. A complete relook is required from the business strategy, tax accountancy and compliance, implementing the IT systems and processes, and also ensure smooth change management across the organization. On the ground, requirements would range from working with logistics service providers in creating new capacities for transport and warehousing, network optimization and optimizing on the modal mix.

What strategy parameters will change for manufacturing companies to get full benefits of GST?

Varun Bhat: From a strategy perspective, manufacturers have to routinely evaluate optimal sourcing, production and distribution strategies. In this evaluation, taxation has a high degree of influence especially in selecting the optimal location of the production and distribution. With state governments offering tax incentives in terms of exemptions and other means, production centers would be located in such zones. In post GST scenario, manufacturers have to renegotiate incentives and exemptions with the respective administrative agencies or move these centers to optimal locations or evaluate contract manufacturing in relation to the competitive dynamics in the post GST scenario. From supply perspective, decisions in relation to purchase categories, price negotiations, supply base consolidation and long term supplier contracts, are some of the decisions that would need to undergo reassessment. In terms of product distribution, strategies towards, inventory flow, stock levels and inventory policies, network structure, logistics movements are some of the parameters that would have to be reassessed.

Suneel Aiyar: By reducing layers, connecting organization tighter with customers & suppliers, GST will make supply chain function gain more prominence and influence within organizations – power shift of a sort. The game will shift from traditional cost focus to value focus. Supply chain leaders and managers will have to demonstrate new set of values & behaviors to run their supply chains effectively. In my view, change in behaviour & mindsets within the organization would be the biggest challenge that needs to be overcome for reaping full benefits of GST.

Manish Panchal: Manufacturing companies will need to take a comprehensive relook at their entire network – right from the source of raw materials, manufacturing locations, distribution warehouses and transportation modes. The elimination of state barriers in the GST regime may make current strategies employed by firms redundant or inefficient and certain other manufacturing strategies may become more attractive. They would require a Project Management Office dedicated to GST to assess its impact, develop new strategies and then implement them to gain benefits.

What would be the impact of demonetization on GST implementation?

Varun Bhat: Per se, there is no direct impact between the Central government’s recent decision to withdraw the legal tender status of high denomination bank notes and GST rollout. The former is a one-time activity and the latter a longterm tax reform. However, one of the common threads between these two reform initiatives is to widen the tax base. Technically speaking, under the existing taxation system, loopholes were identified by various manufacturers, traders and distributors through which, they would sell goods downstream without invoicing and thus avoiding paying taxes. However, under GST, they are being incentivized to sell goods downstream through an invoice in order to claim input credits.

Suneel Aiyar: It would aid investments for building logistics infrastructure as demonetization is expected to make real estate cheaper. Also interest rates are predicted to drop. Growth in digital payments will make e-commerce sector scale faster. With growth in digital payments, role of wholesalers could undergo a change.

Manish Panchal: GST and Demonetization are two completely different policies targeted towards different outcomes. GST is applicable on all value-added business transactions irrespective of the mode of payment whether it be cash, credit or any other bank instrument. Moreover, while the government is targeting the GST rollout by beginning of FY 2017-18, realistically we expect the market to transition to GST only by Q3 of FY 2017-18 and by then the demonetization exercise would have been long complete. Thus, I feel there would be no visible impact of demonetization on GST implementation.

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