GST & Supply Chain

Will April 1st 2017 bring the much talked about GST revolution in India? While this question has been occupying space both on mainstream as well as social media, there is a false assumption in minds of most people, including in the corporate world, that this is a top down initiative. By considering it as top down or macro move, one assumes that it’s more relevant to bigger corporations and for all others it’s business as usual, especially¬†for those far closer to ground. Nothing could be further from truth. The businesses at the bottom of the pyramid have most to lose, and most to gain from this far-reaching reform.

Why is that? Why could they lose? Let’s take the example of a small vendor to a large corporation, say supplying consumables like coffee machines or stationary. Only thing that mattered to the corporate buyer was the quality and consistency of product, not whether the seller was paying appropriate taxes, as that was someone else’s job, whether Government, tax machinery or moral police. Now post GST, in the case of large buyer, it will be his business to know whether the small supplier that’s been faithfully supplying goods or services to him has also been faithful to the state exchequer. Why so? Because both will need to report their transactions, invoice by invoice to the GSTN portal, and confirm the values etc. Moreover, unless the seller furnishes a proof that it has paid tax on the goods sold to the Government, the buyer may have to pay tax again, both for its own business as well as that of seller.¬† So instead of getting double taxed, the large buyer would just ask the seller to either comply with the GST or face the consequence which would most likely mean termination of business and relationship, till the compliance is achieved. And what if there is alternate seller already in place, who provides equally good product; then that’s tough luck for our original small business seller who’s been in business maybe for longer time and has had a stellar record otherwise. And this will happen across the entire supply chain, as whichever part of the link is not compliant will threaten the competitiveness of the entire chain due to double taxation. Thus, the self-regulating feature of GST could potentially push thousands of non-compliant businesses simply out of business. To avoid this scenario, each business above a threshold needs to get itself registered with GSTN and invest in atleast barebone computer system to manage invoicing and accounts and create funding to pay taxes on every invoice at the point of sale before it receives the consideration from the buyer.

To outline following are the steps that small vendors/suppliers must take:

  1. Registration on the GST network
  2. set up of invoicing system
  3. Use it on an ongoing basis

So what could they gain if they were to do this? Clearly, small enterprises that take the pain to adjust to the new world will not only save themselves from extinction, but would also open themselves up for growth opportunities hitherto never seen. They would have been limited by demand in the pre GST era, as they would be largely single state players, or probably even smaller sub part of the state. With GST, they could become regional or even national players, as the entire India becomes one market, and there is no deterrence to selling goods or services from one corner of country to another, except for standard laws of economics, namely best price (including transportation) and best quality. All of these are measurable scenarios, and the compliance with online tax systems becomes easy instead of the old paper based system of returns in each different state. This will tilt the scales for proactive small businesses, especially those that operate in niche markets and have loyalty from customers everywhere. On the other hand, small businesses which don’t comply will lose in competition to aggressive large enterprises that operate nationwide and have the scale to offer the best prices in commoditised business.

It is often said that GST will aid the organised business at the cost of unorganised business, which is not true. GST will certainly sound the end for the unorganised businesses that are noncompliant, but for compliant small businesses, it removes all hindrances to potential multi fold growth. Thus, the biggest loser could be small businesses and the biggest growth opportunities would also be for smaller businesses.

Now obviously, this would mean large corporates while eliminating vendors and dealers who are non-compliant would also want to actively support those that provide an important service or supply goods to be GST enabled. This could be by way of introducing assistance to bring them online, help in invoicing systems and ensure matching of invoices at source rather than after monthly returns are filed, which will lead to chaos.

Thus, on an overall basis, proactive supply chains, which ensure compliance of each link in the chain, and ensure the tax credit is passed through end to end, will be the winners in the fiercely competitive post GST world, and the time to get the element of the chain ready is running out, especially if April 1st brings the promised dawn!

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