Impact of GST on Procurements
By: – Ravi Kumar Somani
Goods and Services Tax – GST
Dated:- 15-3-2017<\/p>\n
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.
\nProcurements 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<\/p>\n
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\n * Currently, purchases being made from CST vendors as local VAT is not eligible as credit;
\n * Purchases being made locally only to avail local VAT credit.
\nIt 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.
\nPurchase price\/ cost
\nIt 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:
\nParticulars
\nImpact on purchase price\/ cost
\nThere will be free flow of credits in the GST regime. Cascading of the taxes will reduce substanti<\/p>\n
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\n * Change in EOQ levels, lead times, carrying costs etc.
\n 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<\/p>\n
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\n\tChanging the purchase forecasts based on impact of GST on sale of a product or on the industry
\n 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:
\n * 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.
\n * How the entire industry in which organization is carrying its operations is impacted due to GST and accordingly change the purchase forecasts.
\n\tTiming of purchases to be re-visited especially during transitional phase
\n 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 <\/p>\n
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\n\tReduction in Purchases from CST vendors or other sources where credit not available
\n 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.
\n\tProcurement from un-registered vendor
\n 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<\/p>\n
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\n * Bill to v\/s ship to location;
\n * Centralized PO v\/s decentralized PO;
\n * Master PO v\/s individual PO's for Just In Time purchases.
\nManaging procurement vendors
\nAs 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:
\n * Vendor masters updation, Tax master updation
\n 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.
\n\tVendor Performance\/ compliance
\n It is very impo<\/p>\n
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\n Therefore, procurement department needs to assess their current vendors and the un-organised\/ non-compliance oriented vendors must be trimmed down.
\n\tIdentifying multiple new vendors
\n 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 <\/p>\n
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\n\tObtaining information from vendors
\n 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:
\n * Name of the Vendor;
\n * PAN of the Business;
\n * Provisional GSTIN No. in each supplying state;
\n * Details of Goods supplied & HSN Code;
\n * Software used by your organization for accounting purpose;
\n * Vendor IT readiness and support required if any;
\n * Understanding of the GST law – trainings
\n * Date of last reconciliation? Any open issue?
\n * Restriction on issuing of PO if above information not provided.
\nDocumentation
\n * 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<\/p>\n
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\n * It is the foremost exercise that need to be in operative for smooth transition of credits into GST regime.
\nConclusion:
\nThese 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.
\n * CA Madhukar N Hiregange
\n * CA Ravi Kumar Somani
Scholarly a<\/p>\n
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