GST strategies

The GST (Goods and Services Tax) council passed the CGST and IGST law on 4th March 2017. What this means is that the law will now be tabled before the Parliament for approval and may be passed in March itself. Finance Minister Arun Jaitley has said that implementation of GST by 1 July is possible. The hazy picture is becoming clearer now with 1 July in sight. The battle cry is now clearly heard.

Let us check some real life examples.

Rethinking what my business means

One of my clients is a manufacturer of kitchen appliances (e.g., kitchen stoves, hob tops, and chimneys). During our discussion, I suggested he try and import high-end cooking ranges, which he does not manufacture in India and which perhaps have a small market, making them unviable to manufacture in India. GST allows you to trade in goods while you also manufacture some —– unlike today, when manufacturers face a lot of restrictions on trading.

“Can I look at some other products,” my client asked when the discussion was at its peak, “something that is not manufactured by any of my group companies?” “Sure you can. GST makes it possible to sell a battel tank along with a safety pin”, I said jokingly. “For last many months, we were thinking of selling a microwave with our products, or even a water filter if possible”, the client persisted. They wanted to move from being a product company to a kitchen solutions company.

A different way of looking at your business is possible under GST. A logistics company, with whom we work, is looking at how they can provide value-add services in their warehouses now that there is no ‘deemed manufacture’ concept under GST.

Before GST implementation, even packing or repacking could amount to manufacture, or even changing labels could attract excise duty, making it necessary to take excise registration and follow its rigorous procedures. Under GST, the rigors are the same whether you are a trader or a manufacturer or a simple processor. ‘Can we look at your business in a new way?’ is the question I often ask my clients to kick start this thinking.

GST India – a strategic enabler

Goods and Services Tax (GST) makes it possible to take a strategic decision like the above — to redefine your business and get into a new expanded market. Tax will no longer stop you from taking such decisions.

Now is the time to re-examine your strategy. An article in Harvard Business Review (July 2015) mentioned a CEB research, which states that strategic risks caused 86 percent of the losses in market value of companies surveyed. It also mentions that these companies devoted only 6 percent of their time to addressing strategic risks, while financial reporting and legal and compliance risks, which accounted for only 5 percent of the losses, were given 52 percent of their time.  Not understanding the impact of GST on business affects strategic risks and therefore should be given more attention.

From strategies to tactics

As we get closer to GST, my clients are coming up with newer ideas and solutions; these are short of strategies but important, as they can save money for their organisations. I call them tactics in the GST battle.

One of our clients purchases from his vendor some plastic components that are exempt from excise duty thanks to an exemption notification. Since the final product is exempt, taxes paid on the raw material used by my client’s vendor are a cost in the vendor’s books. My client’s products attract full excise duty, but the tax cost to his vendor also adds to his product cost. He was therefore interested in knowing the fate of the exemption for components.

“Most likely the exemption will go away and the component will be taxable — maybe at a lower rate of GST, like 12 per cent,” I told him. We often play the role of an astrologer these days.

The client is happy, as he may not have to live with the tax cost under GST. He is now talking to his vendor to optimise his stocks on the transition day. His vendor is instructed to start a new batch from 1 July after taking credit of taxes paid on his inputs — which he was not able to do pre-GST. My client is insisting on almost a zero inventory for his vendor on 30 June so that on 1 July, he can start on a new slate. Difficult though it may be to implement, this is a forward-looking tactic.

For the same reason, some companies are re-examining their expenses in search of ways to save on taxes or defer some procurements before D-day. Some others are deferring the procurement to claim tax credit. For example, a services company that was not able to take credit of VAT paid on its procurement of goods can get credit of GST paid.

It is worthwhile to get your teams — business, finance and others — together in one room now to discuss what new can be done. Rope in your advisors and consultants, as they may throw in some ideas that will make this exercise meaningful. GST is an opportunity, but only if we are able to see one.

Thanks to Dr. Waman Parkhi, Partner, Indirect Tax, KPMG (in India) for this blog contribution.

For GST compliance readiness of your company, fill Avalara’s contact us form here https://www.avalara.com/in/products/gst-returns-filing/

Disclaimer: This blog is made available by Avalara for educational purposes only as well as to give you general information, not to provide specific legal or tax advice. The blog should not be used as a substitute for competent legal or tax advice from a licensed professional in your state or country.