If there is one thing that’s clear from the landslide victory of ruling party in recent elections, it is this: GST in India will become a reality soon. Now the real question is whether India ready for GST?
GST was one of the most searched terms in India last year, and the original schedule envisaged April launch. So one would expect absolute readiness on all sides. A random survey of corporate India though reveals that preparation is just about gathering steam. This, however, seems puzzling. The government has given adequate time to prepare, and most corporates have been demanding for years that GST be brought in. So, one is left wondering, where is the catch?
The explanation is probably two-fold, one is the usual issue of change management and the second is the complexity of this transition. Let’s deal with them one by one and debunk a few myths along the way.
GST calls for a steep learning curve. It’s like learning a new language, with its own vocabulary, expressions, and idioms. A quick look at the lay of this new land follows.
India has nearly 80 Lakh indirect taxpayers. These were earlier divided under excise/ sales/ service and under central government/ states/ union territories. Now they all face a single entity, GSTN, which stands for Goods & Services Tax Network, a quasi-Government body. This entity will interface with 34 GST Suvidha Providers (GSPs) on one hand and various Government bodies like CBEC etc. on the other hand.
What is the mode of communication?
It is a paperless system, which will deal with billions of invoices a month. Obviously, the only way it can achieve this is through computer programs talking to one another through APIs, short for Application Program Interfaces. The data structure and formats (JSON) are standardized to ensure a huge amount of data communication in a secure and seamless fashion.
The GSPs are conduits of information between GSTN and Tax Applications, called Application Service Providers, or ASP in short. ASPs would, in turn, interface with the information system of a taxpayer entity (whether sophisticated ERP like SAP/ Oracle or basic Microsoft office) to prepare returns on monthly basis for onward transmission to GSTN via GSP. This layered system will ensure a robust network with load balancing and helping data security and speed.
So, now a corporate must choose a GSP and an ASP which would prepare the necessary applications, test it and be ready to file returns in next 15 weeks. Anybody who has worked with customizing ERPs knows this is no cakewalk, and this one will be challenging because everyone else will be busy with the same thing at the same time. Think of Y2K transition to get an idea.
Apart from the tactical aspect of timelines, GST is a foundational piece of Digital India, like UID. Apart from making the notion of a single common national market a reality through “One Country One Tax”, it enables a system of tax collection to be self-regulating. It also creates data that can over time assist various critical corporate decisions like Vendor/Dealer selection, provision of credit etc. with analytics.
This will truly change corporate India, in the same way, Aadhar or UID is changing the lives of citizens. Just like UID started from digital identity, but is slowly becoming the bedrock of all public and private services, GST is starting from digital tax; but will end up revolutionizing the corporate world. It is a digitisation exercise on a mammoth scale. There will be winners and losers here. The organized sector will win at the cost of unorganized and businesses with economies of scale would be able to leverage those more freely going forward. However, all this comes with the caveat of complexity which is the second aspect.
Complexity of Transition
So now let’s assume one has fully embraced this foundational change coming through at the CXO level. Now the implementation challenge starts. Businesses are currently organized around silos, whether between sales territories or between departments like purchase, tax/ tech or between divisions like upstream/ downstream. These silos maintain porous borders but deal with one another in aggregate terms- say monthly budgets etc.
The cyclicality of each domain also makes these silos drift apart as a priority of sales, would be at the end of reporting cycles, tax/ accounting after that, IT during times of technological changes, finance during times of market turbulence etc. Given that these external influences are uncorrelated, each silo starts to appear like a different vertical unit over time. GST turns this vertical business organization logic on its head.
On every purchase or sales invoice of goods or services, it would require the relevant owner of activity to collaborate with tax, technology, accounting etc. horizontally. This is due to the unique feature of Indian GST which mandates matching of every piece of data between counterparties. So at one level the sales & purchase would need to collaborate internally. At another level, the purchase would need to horizontally connect to Vendors on one hand and sales with Dealers on the other hand, again invoice to invoice.
All this necessitates making the organization horizontal instead of vertical silos, with the data flow being like a car being assembled on an assembly line by passing through a number of different stages quickly and seamlessly. Now the challenge is the lingo of each of these domains is different. So, for example, the sales guy understands promotions, purchase guy understands returns, tax guy knows the place of supply, finance guy knows discounting and IT guy knows APIs.
Now imagine on one particular sale, this cross functional team needs to collaborate. And this will happen day in and day out, millions of times for large corporates every month. This complexity is not well appreciated yet. To summarize the impact, a corporate may have assessed that GST would increase its net margin by 400 bps or 30%, but that may remain on paper unless it is executed via necessary collaborative teams. And the time remaining for all that again is the same 15 weeks.
The key imperative, therefore, is to internalize the oncoming changes and start executing. Most proactive corporates are ready with their impact assessments on GST, including the warehouse/ logistics reallocation and other consulting inputs. However, the execution of those changes, and customizing to the final business rules that would come soon and create a crack cross-functional transition team needs to be accelerated. The choice of GSP, ASP and other third parties is extremely crucial in this for ensuring that relevant tax inputs are available on a continuous basis given this will undergo changes for next few quarters at least (remember the number of rule changes in demonetisation!) and the scalability and robustness of the IT platform given the likely bunching up of data around monthly reporting dates.
The coming 15 weeks thus hold the key to the potential for smooth transition to GST thereby deriving benefits in terms of transparency, better margins/sourcing/ logistics and creating an analytical foundation by high-frequency rich data for business. On the other hand, the dangers of complacency or lack of expediting activity now can range from chaos leading to suboptimal decisions and lack of input tax credit leading to loss of competitiveness all the way to disputes, blame game and litigations.
Clearly, the choice in the hands of CXO is here and now. Whether to get ready to board this long-awaited train to the promised land or stand in the way of this oncoming freight train that will become more chaotic the longer one waits on sidelines.