Impact of GST on Procurements
By: – Ravi Kumar Somani
Goods and Services Tax – GST
Dated:- 15-3-2017
GST is not just a tax reform but it is a business reform. It shall change the way in which business processes are performed and the way in which the business transactions are undertaken. Although, GST will bring with it, both positive and negative aspects. However, the organizations that will plan its business processes better in a manner to best suit the needs of the GST regime, then such organization will have competitive edge over others. Therefore, it is of due importance that business house proactively re-structure its business processes and optimize its tax position to reduce the negative impact of the changing tax environment.
Procurements department plays a key role in any business set-up as they directly deal with the cost element. Apart from focusing on volumes and margin of sales, businesses also very keenly track the cost of procurements and efforts are alwa
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he excise benefit will be passed on;
* Currently, purchases being made from CST vendors as local VAT is not eligible as credit;
* Purchases being made locally only to avail local VAT credit.
It is pertinent to note that above purchases were being made in the current regime to take the benefit of the present taxes. However, such benefits will not be available in the GST regime, therefore in all cases where currently procurement policy is driven by the tax implications, then all such procurements needs to be re-looked into for the other competitive sources.
Purchase price/ cost
It shall be very important for the businesses to strategies its procurement pricing and procurement cost based on the impact of GST. Below table determines the impact of procurement cost/ price on the purchases based on the various illustrative situations as under:
Particulars
Impact on purchase price/ cost
There will be free flow of credits in the GST regime. Cascading of the taxes will reduce substanti
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perly plan the needs of the production / provision of final products /services. It helps to decide what to buy, when and from what sources. Most organizations spend around 20-60% of their money on the materials, supplies, capital equipment, technology, and services that are necessary to keep the enterprise running. Organizations need to transform their operations by aligning resources and technology and taxes thereon to enable organization to make the most cost effective purchases possible. Various elements of the purchase planning that needs to be looked into from GST point of view are as under:
* Change in EOQ levels, lead times, carrying costs etc.
EOQ is the order quantity that minimizes the total holding costs and ordering costs. Under GST regime entire nation will become a one common market and in case the geographical location of the procurement undergoes a change then a corresponding change in the EOQ levels, lead times and the carrying costs must be planned and accordingly
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nging from 2%-5%. By considering the above reduction in procurement cost organizations should revise the product costing to get better competitive price in the market to edge over others.
Changing the purchase forecasts based on impact of GST on sale of a product or on the industry
Organizations should consider the changing of the purchase forecasts based on impact of GST on sale of a product or on the industry in the following manner:
* If the prices of the products increases in the GST regime, the purchases should accordingly forecasted and procured in advance so that consistent survival in the market is possible.
* How the entire industry in which organization is carrying its operations is impacted due to GST and accordingly change the purchase forecasts.
Timing of purchases to be re-visited especially during transitional phase
The most important thing that the organizations can do during the transitional phase is timing of purchases. If the rate of GST is going to be
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cross utilization of CGST and IGST credits of one state with that of another state, however clarity is awaited on the same.
Reduction in Purchases from CST vendors or other sources where credit not available
Under GST regime transitional credit is available only when such credit is eligible in present regime and also GST regime as well. Since, CST credit is not eligible credit under present CST law, therefore the same is not eligible to be transferred into the GST regime. Hence, in such situations instead of procuring under CST, organizations may consider to reduce the purchases in the existing regime to the extent which will not affect the current sales.
Procurement from un-registered vendor
Procurement from unregistered vendors can have implications in the form of reverse charge liability which could have direct impact on the working capital. Therefore, businesses may have to avoid procurements from unregistered dealers especially in a scenario where the credit is not avail
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pply v/s Composite supply;
* Bill to v/s ship to location;
* Centralized PO v/s decentralized PO;
* Master PO v/s individual PO's for Just In Time purchases.
Managing procurement vendors
As prices are expected to come down in GST regime, every customer would like to procure goods/services at a cheaper price. In this aspect, Purchase department of an organization has to be more proactive to manage their procurements/ suppliers better and to crack a better deal from their vendors. GST is nothing but an opportunity for the purchase department to enhance their vendors list and negotiate, this aspect is being discussed below in detail as under:
* Vendor masters updation, Tax master updation
Once GST is implemented, the first and foremost important task is to update the vendor masters and tax masters with the additional information based on the structural changes and the tax changes performed by each businesses in the GST regime.
Vendor Performance/ compliance
It is very impo
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buyer can take credit of taxes only after discharge of taxes by supplier. Till then, buyer has to wait for the payment by supplier. This becomes a big challenge to the business to follow up with the supplier for taking credits.
Therefore, procurement department needs to assess their current vendors and the un-organised/ non-compliance oriented vendors must be trimmed down.
Identifying multiple new vendors
As GST is a united indirect tax and since it will change the entire dynamics of the businesses, therefore prices of almost all the businesses will undergo a change. Therefore, it gives an opportunity to the businesses consider entire nation as a common market and enhance the geographical purchase horizon and get the quotes multiple new vendors. Therefore, against the current practice of obtaining 3 or 4 quotations, business can identify multiple new vendors and get revised quotations from the existing vendors to obtain for a better and cheaper price at same quality in the GST
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e into the valuation I respect of the related party transactions.
Obtaining information from vendors
A simple information form must be issued to the vendors asking for filling and submitting information that needs to be updated in the vendor masters. An illustrative list of various information that needs to be immediately collected from the vendors is as under:
* Name of the Vendor;
* PAN of the Business;
* Provisional GSTIN No. in each supplying state;
* Details of Goods supplied & HSN Code;
* Software used by your organization for accounting purpose;
* Vendor IT readiness and support required if any;
* Understanding of the GST law – trainings
* Date of last reconciliation? Any open issue?
* Restriction on issuing of PO if above information not provided.
Documentation
* As one of the criteria for allowing the credit under GST would be proper documentation on the basis of which credit is availed under earlier law. Ensuring that all the details of goods lying in
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e that the credits that are lying in the closing balance in the periodical returns filed will only be allowed to be taken as credit in the GST regime. Ensuring that proper reconciliations between books, returns and computations are accomplished to make sure no credits are missed out.
* It is the foremost exercise that need to be in operative for smooth transition of credits into GST regime.
Conclusion:
These are not the exhaustive list of areas or actions that a procurement department has to look into or perform in the verge of implementation of GST. There can be many more business specific or transaction specific impact that one has to be aware of and act. Therefore, it is imperative for the procurement department to proactively understand the impact of GST on their business and act immediately to curb the negative impact and multiply the positive impact to ensure smooth transition into the new world of taxation.
* CA Madhukar N Hiregange
* CA Ravi Kumar Somani
Scholarly a
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