Impact of GST on Procurement in India
With the passing of India’s most important economic reform since 1991, the face of the Indian economy is set to permanently change in the coming years.
A new single tax will greatly simplify the myriad of taxes currently being enforced by different agencies at different stages of the manufacturing and distribution process. At the same time, some sectors might be negatively affected by an increase in the taxation rate.
Here are some points that procurement gurus need to consider about how GST implementation will affect them:
1. Easier interstate movement of goods
Purchasing across states is set to become a lot more hassle free as a unified tax structure will allow for seamless movement across state borders. Currently interstate logistics is a major pain area with a long queue of trucks waiting for clearance by state tax and octroi authorities is a common sight on Indian highways. This will soon be relegated to the past as free movement of goods will be possible within India. It is estimated that this will reduce distribution costs by as much as 10-15% and reduce the time taken for transport at the same time. Along with lesser inventory to be maintained due to shorter transport times, this will also open up a wider base of suppliers that will push costs further down.
2. Prevention of Double Taxation
In the current system, VAT, CST, Excise, Octroi is being levied by different state and central government authorities. Some of these taxes are levied on top of other taxes, which leads to a cascading effect. This drives up the cost of goods significantly. With one single tax being paid, it is expected that the cost of goods could see a significant reduction (based on the tax rate for GST). This cost benefit could then be passed on to the customers, which will indirectly result in an increase in consumption. Moreover, availability of input tax credits will drastically reduce the tax burden on businesses.
3. Uncertainty on Tax Incentives
Certain industries or companies which have been given tax incentives (for eg. Tax holiday for 10 years on all earnings and concessional VAT and Sales Tax for renewables in the energy sectors) might have to forego these incentives with the emergence of a single tax. The government is still working on a framework to manage these incentives. But, there remains the possibility that certain input costs might see an increase. Currently several supply chains are designed to make maximum benefits of these incentives. These might have to be completely restructured to minimize costs to the company.
4. Ease of Doing Business with SME’s
Almost all Indian corporations, no matter how large, have a large number of SME suppliers. Though previously, SME’s had a lot of tax incentives, now they will be able to claim input tax credits on the entire tax amount paid by them. This will, in effect, lower the tax burden on them, leading to a reduction in the price. Also, previously, SME’s operated locally, generally restricted to the state where they were based, due to lack of resources. Now, with a uniform pan India tax, SME’s will find it much easier to conduct business across state boundaries.
The exact implications of GST will unravel over the coming months and years. However, it will go a long way in improving the business atmosphere in India and will have a largely positive outcome in the long term.