One of the most transformative reforms in India takes shape soon. The last article talked about preparedness, or rather lack of it, in some of the users. The situation hasn’t changed materially in the 5 weeks elapsed since then, though the realisation that this important change is unavoidable and imminent, is finally dawning. A panic and sprint to the finish line should be expected soon. That, however, will be the focus of next piece, this one is about sketching life post successful implementation to GST. The rewards down the road should make the pain of transition worth it. So it’s more the WHY, rather than HOW, given that WHEN is more or less settled question now.
GST will bring changes in 3 fundamental aspects of the business : Compliance, Competitiveness, and Credit, or in short the 3 C’s of GST. All of these are important variables for Make in India, the policy that could launch Indian transformation to be the first country to make a transition from developing to a developed country in this century. Let’s look at these variables-
First C: Compliance
This is clearly the obvious objective of GST. The idea of this technology enabled system is to make tax filing process for corporates easier, as it has happened for individuals in last 15 years. The concept of matching transactions with counter-parties will check tax evasion just as individual taxation for salaried employees is more or less full proof. Its the same ecosystem approach, wherein a Buyer would keep its Supplier in check, just as a company would for its employees’ taxation. Given there are millions of small enterprises out of tax net, but most of them would need to deal with larger Buyers that are compliant, this is shifting the burden on that Buyer. This self-policing feature will automatically ensure that the system will become far more compliant as a whole. The design of the IT system will ensure compulsory digitisation across the Supply Chain, which is another huge step forward. This is the first time an API platform-based approach is being used for a Government-related matter, and it shows India is again leapfrogging overdeveloped countries in adoption of the API economy, the pipelines of the new digital world. Remember the new saying “Data is the New Oil”; then API is the pipelines through which this oil flows. Overall tax revenues should certainly see a bump up once the teething troubles of a mindset change, IT integration & trend towards automatic compliance set within first few months.
Second C : Competitiveness
GST should increase the overall competitiveness of the country of each of the economic agents and the country as a whole. Reasons for this are many. The costs and capital deployed in archaic paper compliance systems and the serpentine queues across internal borders within the country should disappear with a seamless single IT infrastructure enables interface across the country. More importantly though, GST would improve a business’s ability to seek credit or refund on taxed paid already on input goods or services. A successful implementation of GST across the entire purchase portfolio of a large business can potentially save a company sum of all taxes paid before, which on case by case could be 10%-20% of cost of goods sold. This is however contingent on crucial concept of invoice matching at a line item level between Supplier and Buyer, which requires innovative solutions given the very short window of 5 days for resolution of mismatches. It is expected that 10-20% of invoices will in general not match. The innovative solutions can reduce that significantly, thereby saving crucial dollars of capital locked in, as well as unnecessary manpower targeted at sorting out the resolution of mismatches. Thus GST enables better compliance leading to better competitiveness on each business unit, turning the current defective logic of competitiveness at the expense of compliance, especially for smaller players. On an overall basis, the GDP output should go up by a few percentage points, while at the same time, the corporate profitability should go up and retail prices would tend to eventually go down. This troika of effects is usually unheard of, though it would follow eventually. Better Compliance, leading to Competitiveness leads us to the third point, the Credit.
Third C: Credit
While most people would agree GST is related to compliance, few would associate with competitiveness; almost no one will link it to the system of credit within the economy. Here is the logic. We observed above that Data is the New Oil. Like the steam engine/ railroads a few centuries back, and the transportation/ computer in last century; the data/ analytics will be the big productivity enhancer of this century. GST makes a huge shift in financial landscape from a data-poor to a data-rich world. This has implications to credit inter-mediation process within an economy. In a data-poor world, one needs trusted entities like Banks that can conduct diligence on different borrowers and provide safety to depositors. Lack of data also means cash-flows would be less important than collateral, as lack of robust projections based on real current data means downside protection can only be addressed by collateral, making it a norm in credit. This skews lending preference from small cash-flow rich yet creditworthy borrowers towards large asset rich yet credit deficient opportunities. In other words, this is skewing access and cost of capital from Startups/ smaller players, asset-light companies to large asset-rich incumbents in every industry. This is not desirable as the country has painfully seen in last few years. The function of credit is to flow towards highest probability of repayment through cash-flows rather than collateral enforcement or refinancing. However, practical experience suggests cash-flows are volatile, not accurately estimated, and accounting and tax books need not be identical. For the first time, GST could make data available that is current and generally available to anyone with consent, which was only otherwise available with banks to a limited extent. There is again no precedent to this anywhere in the world, especially in the shape and design that’s coming up in India. But one thing is sure, access to credit will eventually be significantly enhanced for all good corporates, in as much as flashing an Aadhar card or authenticating bio metric can provide access to individual with good intentions and track record. One would expect a similar rewiring of system in the corporate credit, as is currently underway in personal credit; except that this transformation could be much quicker. The reason is UID only addresses identity issues, and is yet to get fully wired to important markers of credit behaviour or eligibility. In contrast, GSTN data will address both the identity as well as most important metric of health of any enterprise, the cash-flows, the holy grail!
With better compliance, higher competitiveness and superior access to credit, the dreams of Make in India can not be too far behind.