GST: Impact study on business entity

GST is at our doorsteps. In a few weeks from now, GST, in all likelihood, would be implemented. While the professional community is gearing up to face the new challenges in terms of compliance, the business community seems to be lagging behind as far as preparedness of small and medium enterprises (SME) for the big transition to the new tax regime is concerned.  Most SME units look at GST as more of a compliance issue in terms of changes in rules regarding input credit, return filing, registration et al.  What they do not seem to realize is that GST brings out a paradigm shift in the way business is done.  Not only would compliance under the new legislation be different from the current practices, but also GST will change the way business is done.  Therefore, businesses which are well prepared for the new legislation would score over others in this competitive world while those which are not, would suffer and being uncompetitive, may eventually perish.
 
Tweaking marketing set-up
 
Designing branch, warehousing and consignment agent set-up in the GST era requires meticulous planning.  Transfer of stocks to a taxable person's branch or depots or to her consignment agents in states other than her own will be treated as supply and hence is going to be taxable event under GST, although the recipient branch etc. would get full set-off against its GST liability on its own sales/supplies. Under the extant CST laws, such stock transfers are exempt from tax against F Form, though under Excise Act, duty becomes payable on stock transfer. As such, under GST, working capital requirements would go up to that extent.
As such, lots of businesses which had planned branch, depots etc. for tax planning alone, would no longer need them. However, if a depot /branch etc. is required from business perspective, it makes sense to continue with the same. Also, instead of having a depots/branch/agent in each state where supplies are to be effected, one may plan to have one such set-up to cater to the needs of adjoining states.
The enterprise will also have to review its pricing policy in view of the impact of GST on its costs.
 
Relook at procurement
 
Sourcing of inputs would have to be reviewed in the changed scenario and may require sweeping changes in procurement (in terms of inter/intra state, imports etc.), transportation, warehousing, branch network etc. For instance, a Company might be sourcing its raw material locally, as inter-state purchases would have Central Sales-tax element added to it, on which no input-tax credit was available.  In addition, many states have Entry-tax liable to be paid on such inter-state purchases, which is again not `VATable’. Now under the new dispensation, entire IGST paid on such inter-state purchases would be available as input-tax credit.  Hence, the effective cost of purchases would to be lower to that extent.  In the light of this, the business entity would have to relook at all its sourcing decisions, including those of services.  All sourcing from unregistered dealers would require GST to be paid by the registered buyer upfront though input tax credit can be claimed on such payments. So sourcing from unregistered dealers would have to be looked at with a magnifying glass.
 
Working capital requirements
 
There are apprehensions that GST may result in enhanced working capital requirements. This is on account of higher incidence of GST on inputs in many cases as well as owing to funds getting locked up for a longer period of time.
 
Accounting systems
 
Needless to say, GST would necessitate exhaustive changes in the accounting systems of the enterprise. Most external software vendors and service providers are working on making necessary changes to the software.  Where the systems are run in-house, it would be necessary to act on the accounting system fast to meet the new requirements.  Also, a lot of data for filing of returns would be picked up from accounts. Therefore, accounting system would have to be redesigned accordingly.
 
How should we carry out Impact Study
 
Needless to say, lack of planning on the part of business can play havoc and make your business noncompetitive. It is high time that we wake up and plan our business decisions in the changing business environment under expert guidance. 
  
Manner of conducting an impact study


We have to appreciate that an impact study is different from audit exercise. It is more of a systems audit with focus on GST.  In conducting an impact study, the professional has to have extensive discussions with teams drawn from different functions; review major contracts, MOUs, invoices and documents; and then do some test checks and sensitivity analysis based on projections.
 
Additionally, there may be many other areas requiring review like impact of anti-profiteering clause, FTP benefits, IT/ERP customization, preparedness for GST returns filing etc.
 
Conclusion 


As mentioned before, GST is not just a matter of routine compliance but has much wider ramifications. We as professionals can use this opportunity to guide our clients in a well-researched, forward looking manner with a view to maximizing his business potential.