The country expects the Goods and Services tax (GST) to be implemented shortly, and companies need to prepare to capture potential gains and avoid the pain of internal and external mis-alignments. Many firms have already started. In a 2014 survey of Chief Financial Officers in the Indian retail sector, 88% reported they were at least partly prepared for GST.
Observers have said GST will be the single-biggest reform since the opening up of the economy in 1991. It will likely reduce price distortions, encourage capital investment by eliminating cascading taxes, enhance export competitiveness and help create a seamless national market. By cleaning up India’s morass of entry taxes and easing the nightmare that companies face at octroi and state checkpoints, GST will make logistics simpler and more efficient. One estimate suggests that by reducing the time that freight spends in transit, for instance, and by eliminating long delays at inter-state checkpoints, this reform may quickly cut inventory on wheels by four to seven days.
Adapting to GST, which means ensuring compliance and an automatic share of post-GST benefits, will itself require extensive changes. However, winning companies should look beyond merely adapting. In an economy expected to be on an upswing, acting now can deliver a boost to companies’ competitive positions. We suggest that companies act proactively across five focus areas.
The first focus area is programme management. Firms can set up a dedicated programme management office to oversee the change process. The programme management office will involve key employees and stakeholders in a structured way, engage in external liaising and ensure internal alignment across the company’s departments. It will steer the design and adoption of new processes, drive the upgrade of IT systems, manage overall reporting on metrics and stakeholders’ communication, as well as address employees’ concerns about the impact on their jobs.
The second focus area is efficient strategic planning, for which there will be supply chain and revenue implications. For instance, GST will cause one decisive change: Intra- and inter-state transactions will incur equal tax liability and tax considerations will no longer hamper operational efficiency. Companies will be able to target end-to-end supply chain optimization across their manufacturing and warehousing footprint, as well as inbound and outbound logistics.
One way to do this could be to use fewer, but larger warehouses in a more efficient hub-and-spoke logistics model. Consider, for instance, a reported move by DHL to invest in warehouses in India roughly five times the average size in preparation for GST. Although DHL is a dedicated logistics firm, this indicates what post-GST logistics could look like.
Companies must recognize the advantages of scale and consolidation, and devise supply strategies to gain maximum benefits and, importantly, factor in practical timelines. To enhance revenue implications, companies should revisit market entry into states that may have been unattractive due to tax-related concerns.
Moreover, firms need to actively evaluate how competitors might modify pricing in response to GST benefits, how customers might react and how they can ensure customer retention in a potentially fluid post-GST market.
The third area is operations. To align with the GST regime, firms will need to redefine key processes, including those related to finance, taxation, logistics and warehousing. In finance, companies will need new cost tracking dashboards and reporting formats as information flow will need to be streamlined. Similarly, in taxation, companies will have to revise processes to deal with new agencies and new taxation forms. Working closely with key value chain stakeholders—suppliers, distributors and retailers—to help them become GST-ready will also be important. Not doing so could mean delayed or lost tax benefits.
IT systems are the fourth focus area where businesses must plan for significant changes and upgrades. In a survey of companies, 40% respondents felt that changes to IT systems would be the biggest challenge in adapting to GST. New GSTcompliant technology, such as an IT system for automation of tax calculation, will have to be purchased, tested and integrated with existing ERP (enterprise resource planning) systems well before the start date. Invoice-based taxation under GST will require tighter information system integration across the value chain from supplier to retailer. Optimization tools used for operations—such as for deciding optimum freight routes, inventory and stocking norms—will have to be reworked.
The last focus area is the organization, which will need to be re-aligned across three key aspects—structure, people and decisions. Changes in supply chain design, such as a move to a hub-and-spoke distribution model, will require complementary structural changes in the logistics organization. On the people front, more employees may have to be added to bring in-house some functions, such as management of warehousing operations, currently outsourced to clearing and forwarding agents. On the other hand, scale may offer additional outsourcing possibilities. Firms will be able to engage with larger, more tech-savvy and professional market-leading services providers, which is hard to do in a fragmented
environment. Companies will need to evaluate these options carefully. Finally, making swift, effective decisions related to logistics optimization will be critical to coming out on top. This may require a complete revamp of the existing supply chain-related decision matrix.
The exact shape of GST remains unclear. But the scale and crucial nature of the actions required to be prepared mean that companies cannot afford to wait on the sidelines.