Preparation for GST and Re-engineering Business Processes

22nd January, 2010 Dilip Save

Contents Preparation for GST and Re- engineering Business Processes Evolution of tax structure in India Benefits of GST Impact on operations Four fold approach Integrated supply chain Pricing, Tax management Accounting and IT system Action plan

Evolution of TAX structure in India

Simple to administer & High Compliance

High

Simplicity

Moderate

Introduction of GST Introduction of VAT

Legacy Tax structure

Complex to administer & Relatively Low compliance Low

Moderate Complexity to administer & Relatively High Compliance

Prior to 2005

2005

2010

Compliance
Low Moderate High

Benefits of GST
Government:

Consolidation of multiple Centre & State taxes Increased tax collection on wider tax base Effective administration

Business:

Reduction in cascading effect of tax on tax Reduction in effective tax rate on goods & services Ease of compliance Economies of scale

Consumer:

Reduction in incidence of tax on goods / services Benefits of scale & tax to manufacturers/service providers pass on

GST : Impact on Operations

GST will impact every aspect of Business Operation.

Sourcing

Manufacturing

Distribution

Sales

ERP - Base Line operating system

Service Providers & IT Support

GST Business Impact Analysis

GST: Transition, 4 fold approach

Transition / Cutoffs ERP to be GST compliant Automation & interlocks Statutory reporting from ERP KPIs to monitor compliance & benefits

Business Drivers will define Supply Chain

Mfg location Sourcing strategy Manufacturing strategy Distribution strategy

Thus GST Presents Both Pricing Accounting / ERP to be Challenges andBIA Opportunities System to be GST Efficient GST compatible To Re-Engineer Business Processes & Operations transfers Alignment within business Stock
Training to all stake holders Extract all eligible ITCs Fiscal compliance

Re Engineering Tax Management

Inter-state sales Direct despatches Stocking points GST efficient pricing

Business drivers will define Supply Chain Sourcing

Sourcing strategy Negotiations Documentation Alignment Payments

Challenges
- Greater Transprancy for mutual advantage - Global benchmarking - Develop & levrage local suplliers

Opportunities

- Capture all elegible ITC - Skin out credit from supplier price - Align and interface document flow PCP/PO/Inv.. - Capture Source and Destination at PO stage - Sourcing from registered suppliers only Sourcing - Correction of purchases transactions thru issue of back to back Debit / Credit note - Purchase details with state cut directly from ERP - with Optisuite enabler - Re-look at works contract / conversion contracts - Document flow - Stock holding points and stk levels - Star Vendors - Standardize distribution for all Imports - Process aligned Master Data Base

Business drivers will define Supply Chain Manufacturing

Concept of manufacture will be irrelevant New challenges from single point to multi point taxation. All goods would attract GST at every value addition point Evaluate forces which impact supply chain - Some intrinsic to the organisation [value addition] Some market specific Some fiscal in nature Influence of differential tax based on geographical locations will continue for some time (fiscal incentives) Transition from origin based to a destination based tax regime. [ Tax on Consumption ]

Challenges
Economies of Scale v/s Refund Central mfg > interstate trf > higher refund etc Capturing tax liability at the point of every transaction / interstate movement Exemptions to be phased out; business to explore new avenues for cost savings STO = STI -

Opportunities
New challenges arising from single point tax to multiple point Import of FG v/s mfg inhouse In house manufacturing v/s contract / Job work manufacturing w/c & admin cost , documentation

Manufacturing -

Leverage on Depot delivered cost v/s ex fty cost

Business drivers will define Supply Chain Distribution

Avoid multiple stocking point Opportunity to compress supply chain and derive cost advantage

Challenges

Opportunities

Distribution

- Hub & Spoke arrangement to be reviewed in - Avoid multiple stocking points; consolidate line with GST distribution centres - Infrastructure at depots and stocking points Re-look at Frt negotiations and agreements : need revamp. - Large transport operaters v/s local players - Valuation of goods for movement of FG on - APO model to be modified to consider " Stock transfer. Service From Any where"
(Advance Planning Optimizer)

Pricing to be GST efficient Sales

State-wise depot may be irrelevant;
Regional depots direct dispatch Working capital impact,

Challenges
Sales Stock transfer - Impact on WC Compress Distribution network Re-look Depot / RS documentation and agreements GT/MT/CSD to analyse and work on merits of individual channel Challenges wrt Price Inc / Drop & transitional issues. Evaluate Business impact on all categories and businesses: action plans to address them. Appropriate pricing decision

Opportunities
- Reginal deposts in place of state depots - Challenge to consolidate various RS points - Leverage Direct Dispatch across the states - Set off of GST on distributions, sales & marketing spends.

Pricing to be GST efficient

GST Efficient pricing - Examine precise impact for timely pricing decisions to protect margins - Strategic planning for products / services adversely affected - Strike a right balance between tax incidence and price Operating cost / COGM Tax Incidence Price Low High Low Low Maintain or High High High Low

Product Mix

Can change based on result of above two factors and market demand

Re Engineering Tax Management

Alignment within business

Examine touch points for various business functions Study financial impact; top down exercise with different scenarios Business continuity plan to address specific concerns Align business processes to be GST complaint

Training to all stake holders

Awareness and training to business teams and operating people Support to external stake holders : suppliers, distributors, etc.

Extract all eligible ITC

Tracking and settlement of credits in inter-state movements / sale Set off / refunds of ITC in full and on time

Fiscal compliance
Full compliance to be driven through collective responsibility Build in-house competencies and expertise

Accounting / ERP system to be GST compatible

ERP to be GST complaint

Engagement with SAP team Build industry consensus on acceptable format; escalate to policy makers Identify areas/processes requiring change; support operating groups in implementation Prepare for complications arising out of partial implementation of GST in the country Integrate all operations into ERP system

Automation and interlocks

- Minimal human intervention - Ensure correctness and completeness

Transition / cut offs

- Certification of stk on cut off dt

- Statutory reporting
- Build enablers to facilitate reporting and compliance - Reconciliation of monthly and annual returns with financial ledger - Statewise accounting and trading account

Accounting / ERP system to be GST compatible

Challenges

Opportunities

- All operations need to be integrated into ERP - Statutory reporting from ERP - Work with SAP to develop specifc req for - Single data base for financial & statutory capturing and reporting of purchase and sale returns; system to generate returns data. - Tracking and settlement of credit in inter-state - Fiscal compliance to be made easy; to be a movement - a challenge collective responsibility. - CGST & SGST on each transaction to be - Masters (Product/Price/A/c to be aligned in accounted separately with linkage to state of line with all India basis origin &state of destination/consumption - System to consolidate tax / set-off & determine of tax liability - Enhance payment tool ( Ariba ) capability to handle complexity

Accounting

- Reconciliation of monthly and annual returns - Full setoff on entity basis: a big opportunity with financial ledger - Automation & interlocks in ITC

Key Deliverables -Accounting

All operations need to be integrated into SAP system

State-wise accounting of all transactions a must to facilitate preparation of state-wise trading account. CGST & SGST on each transaction to be accounted separately with linkage to state of origin and state of destination / consumption Corrections to purchase and sale transactions thru issue of Debit / Credit notes System to consolidate tax / set-off and determine of tax liability Reconciliation of monthly / annual returns with financial ledger Management of fiscal documents and records

Tracking and settlement of credit in inter-state movement a challenge

Ensure full refund of input tax credit on taxable goods and services

Basic changes to - IT Systems SAP or any other ERP

Discuss with SAP Discussion internally with IT and functional team, Discussed with industry to get insight to the Basic Structure changes required to align existing ERP to GST scenario
eg Changes required to ERP Architecture to capture Dual Tax Capture , Source Destination information State wise ledger Simultaneous run of GST & current system

Develop wrt transaction system e.g. on Sourcing Model, Sales Pricing, Current Excise, capture SGST & CGST separately etc.

Develop Obtisuite ( new application SAP supported) to collate and report SGST/CGST data, state trading account to be developed. ( Its SAP R3 enabled application and recognized by SAP)
Preparation of Accounting SOP

Action Plan

People

Core team of cross functions in place to drive GST implementation Cascade learnings to operation groups and stake holders

Systems

Engagement with SAP team for smooth changeover Build industry consensus on acceptable format & escalate the same to the policy makers Identify areas/processes requiring change; support operating groups for implementation Prepare for complications arising out of partial implementation of GST in the country

Govt liaison etc

Engagement with Govt. to ensure concessional GST rates on foods portfolio Redressal of issues arising out of GST (e.g. GST on inter-state stock transfers)

Business

Examine touch points for various business functions to leverage on GST Examine financial impact on the company, top-down exercise considering different business scenarios awaiting announcement of GST rules and final structure

Thank you !