Will It or Won’t It? The $1.5 Trillion Question of India’s Tax Reform

By Mayur Vamanan, Director of Consulting, Chainalytics India Growing up, I spent my summer vacations with my grandparents. At bed time, my Paati (Tamil, for...


By Mayur Vamanan, Director of Consulting, Chainalytics India

Growing up, I spent my summer vacations with my grandparents. At bed time, my Paati (Tamil, for grandmother) would tell my siblings and I the most interesting stories. My favorite happened to be about two mischievous boys who were tasked with shepherding the village’s cattle.

One day, out of boredom, the boys devised an ingenious way to abdicate themselves of their shepherding responsibilities. They ran to nearby villagers’ houses, exclaiming that they had seen a ferocious tiger in the vicinity. The villagers became frightened, quickly bringing their cattle back in from pasture.

After several false alarms, the villagers began to catch on to their tricks, calling the boys on their bluff. The villagers agreed that they shouldn’t heed the boys’ future distress calls.

One fateful day, an actual, real, ferocious tiger stumbled into the village. The two boys frantically knocked on the villagers’ doors, crying “Tiger!”, but the warnings fell on deaf ears.

By now you probably know where this story is going… The tiger eventually made its way into the pasture and had a scrumptious dinner.

Tigers & India’s GST Tax Reform

A similar situation to my grandmother’s tale has played out in India over the last several years. The Goods and Services Tax (GST) is a game changer in the classic sense: It levies a comprehensive indirect tax on the manufacture, sale and consumption of goods, replacing around a dozen indirect taxes such as excise duty and sales tax (at national level) and octroi, sales, value-added, entertainment and purchase taxes (at state level).

This notion of a GST has been advanced numerous times since 2000. Much like the two boys, Indian political establishment and bureaucracy have called to India’s corporate leadership and multinationals, warning them of its coming passage for several years.

Many companies have been lulled into a false sense of security over the last decade from these false cries, ignoring the coming changes and opportunities that are now eminent.

On the contrary, several others have prepared, taking steps to strategically position themselves to gain an advantage when GST becomes a reality.

What Implications will GST have?

Successful implementation of India’s GST will result in a new “Indian common market” without the artificial shackles that currently bind the movement of inter-state goods. Currently, India’s tax environment incentivizes companies to operate warehouses in EACH of the 29 states in order to avoid the inter-state sale and other indirect taxes that come with the cross border movement of goods.

Under the new GST tax framework, a single tax rate uniform across all states will be charged based on the destination principle. Without the prior tax rate fluctuations, supply chain networks, the location of plants and warehouses, will now be influenced by true logistics costs: fixed and variable warehouse costs, freight costs and inventory carrying costs.

If you recall, after the formation of the European Union, supply chain networks were successfully reformed and refreshed, trade barriers were alleviated, and large, centralized manufacturing and distribution hubs were able to reduce a myriad of supply chain costs.

GST Fast-tracked for Approval

The most recent iteration of the GST bill has passed in the Lok Sabha (lower house of parliament), where the Narendra Modi led BJP Government has an absolute majority, and has been introduced in the Rajya Sabha (Upper House), where its passage is less certain.

The Congress, India’s main opposition party, and several regional parties with a presence in the Rajya Sabha, want the bill to be referred to a select committee for approval. The main issues being raised are that the bill has several amendments (compared to the original version introduced by the previous Congress led Government) and that net exporter states will stand to lose. Once the bill is passed in the Rajya Sabha, the GST Council (to be constituted of Union and State finance ministers) will formulate the modalities – systems, processes and rules – in time for an April 1, 2016 rollout.

Much like the boys yelling “tiger” in my Grandmother’s story, GST implementation has become a bit of a joke. Corporate India has spent years preparing for the arrival that wasn’t to be and GST became another example of the government’s failure to act decisively.

Today, the smart money is on the current pro-business BJP Government to navigate the myriad challenges currently facing a successful implementation of GST. Companies need to be prepared for the imminent and sweeping changes that can offer opportunities to save money and run their business more efficiently. For starters, companies should be evaluating their supply chain network configuration and its suitability for a GST environment. Optimal inventory deployment is also likely to be very different in a GST environment.

The Moral of this Story?

The moral, as told by my grandmother: “Never lie”. However, I would like to think that “Always be prepared” is just as applicable.

At Chainalytics, we have first hand experience helping several large enterprises in a variety of industries with their GST preparation. Potential supply chain cost savings between 15-20%, as we have shown in our studies, makes this evaluation a no-brainer for companies.

If you need help preparing for GST, simply contact Chainalytics using the form below.

Mayur Vamanan is a Director of the Supply Chain Consulting at Chainalytics India. In addition to leading client engagements, Mayur is responsible for advancing Chainalytics’ project delivery methodology within the Supply Chain Design and Sales & Operations Planning competencies. 

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