Understanding Business Changes Under GST

Introduction

The introduction of the Goods and Services Tax (GST) in India has significantly impacted how businesses operate across various sectors. Companies must understand these changes to adapt effectively. The GST framework influences crucial business decisions, including warehousing strategies, product pricing, management of working capital, and stock transfers. Previously, logistics choices often aimed to minimize state-level taxes, but GST necessitates a comprehensive reassessment of these practices.

Existing Business Procedures

Before GST, businesses typically based their raw material procurement decisions on state-specific taxes and associated logistics costs. This approach helped reduce procurement expenses and maximize input tax credit claims. Manufacturers generally set product prices close to the average market rate for comparable goods. Furthermore, major manufacturing decisions, such as facility expansion or make-or-buy choices, were largely driven by state tax structures and logistics costs.

Business Functions Transformed by GST

GST implementation is expected to lead to a notable reduction in manufacturing costs. Consequently, product pricing strategies will require revision to reflect these lower costs and to remain competitive in the new, integrated market environment. Key business functions that need adjustment under GST include:

• Legal Departments: Organizations must determine appropriate tax rates, adhere to new place of supply rules, manage existing tax incentives, and ensure correct product valuation.
• GST Impact Assessment Teams: Dedicated, qualified professionals should evaluate the strategic and operational effects of GST on various aspects, such as revenue streams, procurement processes, product costing, pricing, working capital, cash flow, and warehousing decisions.
• Supply Chain Management: GST is anticipated to ease the burden on logistics. Businesses will need to redesign their operating models for sourcing and distribution to leverage the simplified tax structure.
• Accounting, Reporting, and Compliance: Adjustments are necessary for managing tax credits, payments, invoicing procedures, accounting entries, and the overall risk and control framework.
• Technology Systems: Existing technological systems will require upgrades to handle the new accounting and reporting requirements under GST.
• Company Policies: Policies related to expenditure, quality assurance, and investments must be reviewed and potentially redrafted to align with GST regulations.
• Personnel Training: It is essential to educate current employees, suppliers, and customers about the specific changes and their implications for the company under the GST regime.

A smooth transition from previous tax laws to GST depends on addressing all these areas. Historically, businesses maintained numerous warehouses across different states to avoid Central Sales Tax (CST) and the associated administrative complexities. With GST, CST is subsumed, fostering a more integrated national market. This eliminates the necessity of having warehouses in every state. Since tax rates are generally consistent nationwide, state borders will no longer be a primary factor in logistics planning.

Conclusion

Every enterprise must proactively address the adjustments required for successful GST implementation. Organizations should establish a clear timeline for transitioning to the new GST law. Taking a proactive stance on GST compliance can significantly improve relationships with both suppliers and customers.