GST May Cause Inflation Initially, But in Long Run Prices Will Fall

(Published in http://www.news18.com/news/business/gst-may-cause-inflation-initially-but-in-long-run-prices-will-fall-1448159.html on June 30th, 2017)

The Goods and Service Tax (GST) regime in India has been marked as one of the biggest tax overhaul since independence. It has been designed to replace the complex set of more than a dozen levies, imposed by the central and state governments, with a uniform national levy.

This reform is expected to result in numerous benefits for stakeholders and bring economic integration in the country. The GST is aimed at unifying tax rates and facilitate ease of doing business, resulting in India being one unified market. GST aims at a system of seamless input credit that would flow through the entire value chain, which would help eliminate cascading effect of taxes and consequently reduce cost of doing business. This would eventually lead to a situation where the domestically manufactured goods and services are available at lower prices, which would increase their competitiveness in the international market and give impetus to Indian exports.

The GST is a consumption based tax and a dual levy with state GST and central GST. Further for   inter-state supplies Integrated GST (IGST) ie aggregate of state GST and central GST will apply. The GST will be a unified tax on supply of goods and Services,. GST is aimed at being a tax only on value addition. Through the system of availability of taxes paid in form of input credit, in effect the customer would end being charged only for GST as levied by the last dealer in the chain, as for all previous stages the input credit would be available to set-off GST liability.   

The GST regime requires the taxpayer to file monthly returns as per their status. For those who are registered with GSTN, and have not opted for Composition Scheme, would need to file the following returns[1]:

·       GSTR-1: Related to outward supply of taxable goods and services and is to be filed by the 10^th of next month. GSTN-1 essentially is filing of sales invoices of the previous month, in the format provided by GSTN.

·       GSTR-2: Related to inward supply of taxable goods and services and to be filed by the 15^th of next month. GSTR-2 is provided by GSTN and the taxpayer has to simply check it against their purchase register. This ensures that the taxpayer does not lose on any tax credit.

·       GSTR-3: This is the monthly return and is to be filed by the 20^th of next month. Again, this is provided by GSTN. It needs to be downloaded from GSTN, verified and filed.

·       GSTR-9: This is the annual return to be filed along with the financial statements by 31^st December of the next financial year.[i]

Under Composition Scheme

Composition Scheme under the new GST regime is aimed at facilitating ease of implementation and compliance process by small taxpayers. This scheme allows qualifying taxpayers (whose turnover in the preceding financial year was less than 50 lakh) to pay a percentage of their yearly turnover in a state, as tax . Further under this scheme taxpayers would be required to file summarized returns on quarterly basis instead of monthly returns. Returns to be filed under the Composition Scheme are:

·       GSTR-4: Quarterly return to be filed under composition scheme by the 18^th of the month succeeding quarter.

·       GSTR-9A: This is the simplified annual return to be filed under the under the composition scheme by 31^st December of the next financial year.

GST is expected to significantly impact the Indian economy. From an end customer’s standpoint there are certain benefits which the new regime would garner. GST is expected to minimize the cascading effect of taxes and remove hidden and embedded costs that the customers had to pay up-until now. This would also ensure more transparency in the system as the customers will now have a fair visibility on the taxes being charged to them and the basis for the same as well. Further, GST implementation is expected to result in seamless flow of input credits. With this the net amount of indirect taxes implanted in the value chain would reduce and ultimately would result in relatively lesser prices of goods and services in the ordinary scenario. The anti-profiteering measures incorporated in the regime would push businesses to pass down benefits on account of GST to the end customer.

Benefits of GST are primarily dependent on the successful adoption of GST across all the enterprises. While larger organizations that have an existing ERP or electronic invoicing system would possibly be able to step up and adopt GST faster, they would still need to ensure that their vendors/distributors/dealers are all GST enabled in order to claim valid tax credits. Further larger the transaction base, greater the probabilities of invoice mis-matches, necessitating reconciliations which would involve a big workforce.

 On the other hand, for the Micro, Small and Medium Enterprises (MSME) segment GST entails a mammoth overhaul. With limited or no information technology solution or invoicing system prevalent, this segment would find it a challenge to adopt GST, given its complexity. It would also entail significant upfront costs to adopt the minimal technology needed to effectively and efficiently be part of the GST regime, which is critical for the for the success of this regime.

Effective adoption of the new regime and its implementation, especially by the MSME segment becomes undeniably critical. It is imperative for small vendors to enter invoices electronically, as non-compliance by one entity in the value chain would impact other entities in the value chain including large organizations and in effect defeat the intention of a unified tax structure.

To address this issue that concerns over millions of MSME’s registered with GST Network (GSTN[2]) in India, many softwares are now available. One of the most thorough [AP1] and affordable GST solution that provides a range of services, the service is offered by KPMG in India in association with HP. The solution is available at www.hpshopping.in/GST/kpmg.

The KPMG-HP GST Solution has been designed and built keeping Indian MSME’s in mind and it works out of the box, without the need for any significant technical intervention. It includes a rugged laptop, GST invoicing software that supports invoice mismatch management and GSTR filing, built-in connectivity support, cloud provisioning, automatic backup of invoices, interfacing with GSTN through GSTN Service Provider and provisioning of e-Sign. All this is provided at a monthly charge instead of a large upfront cost, thus reducing the burden on the MSME.[AP2] 

It is critical to have the MSME’s become GST compliant as they contribute to over 40% of the economy and provide bulk of the non-agricultural jobs. Moreover, large firms cannot be GST compliant unless their ecosystem of MSME’s are also GST enabled since if their MSME supplier is unable to file their GST returns, the larger firms will not be able to claim their input tax credits.

The transition to GST will be challenging as seen with other countries. Malaysia ended up having months of protest despite providing a year and a half for the industries to get ready. Empirically, GST also leads to inflation initially, as not only the tax rates are slightly higher, but also as the tax evasion is reduced, leading to an added cost of tax in the supply chains. Eventually the benefits of GST start kicking in, leading to reduction in costs, and hence prices, leading to reduction in the cost to the economy.

The GST would need the support of the government and the industry to make it a success. It would be critical to ensure that the MSME’s are provided a helping hand for this transition. We would expect significant number of fine tunings to happen before the GST regime settles down. At the end of it, the economic gains of GST would be worth the transitionary pain.

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[1] The Central Goods and Services Tax Act 2017

[2] News reports

BTVi India's Digital Leap

KPMG HP GST Solution

KPMG HP GST solution

My views on BTVi on India's Digital Leap

My views on BTVi on India's Digital Leap

Growth Strategies in a Highly Disruptive World

This article was published in BW Businessworld issue dated 'April 2, 2017' with cover story titled 'India’s Fastest Growing Companies 2017'

Extreme automation refers to such rapid pace of automation that for the first time in history, more jobs are getting destroyed by automation than those getting created by automation

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30March, 2017by Dr Jaijit Bhattacharya

Companies have always been operating in a disruptive world, and those who could manage the disruptions, have survived, while others have folded up in the sands of time.

The oldest companies to survive are from Japan, with Kongo Gumi topping the list as it dates back to 578 AD (it continues as a subsidiary of Takamatsu Construction Group from 2006). Clearly, it indicates that relative political stability is a necessary requirement for survival and growth of companies. However, that is not a sufficient requirements, as is shown by a litany of firms that have closed down and gone off the collective memories of people.

But the disruptions that companies face now in the 21^st century, are qualitatively and from an impact perspective, significantly different from anything that companies ever faced previously. Which is why, in the turn of this century, one of the oldest independent companies in the world, Kongo Gumi, had to finally become a subsidiary to another company, after roughly 1500 years of existence. We will be witnessing one of the largest mass extinctions of current companies, as the next two decades roll in. The reason for such a large mass extinction of companies would be their inability to be able to survive and grow in the rapidly changing global business scenario.

So what is fuelling this rapid change in the business environment? Fundamentally, there are five forces that are driving this change – (a) Extreme Automation, (b) Changing demographics, (c) Changing geo-political landscape, (d) Simultaneous playing out of protectionism and globalization and (e) Regulatory response of the government.

Extreme Automation refers to such rapid pace of automation that for the first time in history, more jobs are getting destroyed by automation than those getting created by automation. This is in turn driving social unrest, such as Jat agitation, anti-globalization sit-in’s, movement against exiting from trading blocs such as the European Union, riots in China etc. Politicians are responding to this challenge by identifying different root causes for the social unrest, leading to new trade policies such as the evolution of a new economic philosophy of the US government, popularly referred to as Trump economics, UK’s exit for the European Union, popularly referred to as BREXIT, anti-immigration policies of a host of countries and so on.

Extreme Automation is also forcing governments and economists to think of new ways of redistributing wealth as jobs become scarce and the economy could come to a grinding halt of demand evaporates due to joblessness. Hence concepts such as Universal Basic Income (UBI) are being considered, which would also imply different kinds of taxation systems evolving.

And of course, Extreme Automation will also threaten existing business models, completely wiping out some businesses (such as camera, watch and music devices companies getting threatened by smartphones and hence needing to reinvent themselves) or significantly reducing the number of players in those businesses (such as number of trucking companies reducing due to autonomic computing, as it may tend to push the market towards consolidation).

The issue of Extreme Automation will get compounded by changing demographics. Some nations, such as India, have over 50 percent of its population below the age of 25. With jobs reducing due to Extreme Automation, such countries and businesses in these countries, will face significant challenges. Some nations such as Japan, have roughly 35% of the population above the age of 65, with a predicted rapid increase in the geriatric population. This would fuel the demand for automation that supports the geriatric industry, such as supporting robots, autonomous healthcare systems etc. It would also eventually see large scale migration of workers from countries that have excess trained workers to countries that do not have sufficient trained workers, in the backdrop of xenophobia and anti-immigration laws. The scenario would be, to say the least, very complex.

From a business perspective, businesses would have to cater to a burgeoning population of millennials, who have very different requirements, and also a burgeoning population of possibly rich retired people, that would have a very different demand and requirements.

Such rapid changes globally, juxtaposed with perceptions in various pockets of the world that their people have been given a raw deal in the post-colonial era (or as some would refer to it as the neo-colonial era), with a savage competition for control of resources, has led to very severe geopolitical issues and challenges. This has also led to the rise of terrorism and asymmetric conflicts. Such asymmetric conflicts has been further exacerbated by cyber conflicts, which is being leveraged by both powerful nations as well as by individual teens, sitting out of attics.

These geopolitical changes are impacting businesses, increasing their cost of doing business by increasing cost of safety, security, business process continuity investments and cybersecurity for themselves and their clients/customers. It has also increased the cost of managing liability.

Such changes are forcing a simultaneous playing out of globalization and protectionism. Globalization is happening beyond the control of governments, with free flow of ideas, concepts, business models etc, driven by ever increasing communications connectivity, road and rail connectivity, airways connectivity and regular shipping and coastal shipping connectivity, alongwith banking, finance, gas grid and electricity grid connectivities. This has led to ever increasing migration, which has been accelerated due to conflicts in certain areas, as well as ever increasing attempts to legally reduce taxation burdens by leveraging the tax regulations various countries in an era of global production and supply chain. As a response, governments have been clamping down on immigration and bringing up protectionist walls in an attempt to reverse globalization, primarily with an objective to keep jobs for their nationals and to shore up their tax revenues.

The above forces of Extreme Automation, Changing Demographics and Changing geopolitical landscape and Simultaneous playing out of globalisation and localization, has led governments to react with a spectrum of regulatory measures. These measures are not limited to immigration, but extends into tax measures such as regulations on Base Erosion Profit Sharing (BEPS), Place of Effective Management (POEM), General Anti-avoidance Rules (GAAR). The regulatory responses also appear to extend into areas such as reservations in the private sector. It would also include economic policies on wealth redistribution such as Direct Benefit Transfer (DBT) or Universal Basic Income (UBI). There would also be regulatory challenges around new technologies such as liability identification for autonomic driving, taxation entity in terms of home based 3D printing etc. Governments are also bringing in regulations from a security perspective, such as but not limited to, preventing travellers flying through certain destinations, to not carry electronic items.

Now that the expected nature of disruptions are somewhat identified, it now brings us to what companies should be doing to address these disruptions and manage growth.

The first mantra is, paraphrasing a quote from Mahatma Gandhi, Be the Disruption that you want to address. Companies need to evolve need organizational structures to be able to creation an organization that continually works on innovation and disruption, while scanning potential disruptions while they are at an infantile stage.

The second mantra is to leverage disruptions. Every disruption is an opportunity to have disproportionate growth, as long as you are one of the first to identify and act on the disruption. Established companies have the advantage of relatively deeper pockets and a stable organization, as compared to startups, and are hence in a better position to be able to implement a disruptive idea.

The third and last mantra is to have an effective Regulatory Strategy that helps the companies work in alignment with the government’s policies and regulations, creating synergies that contributes to national priorities while generating sustainable profits. It would be impossible to address the mindboggling hurricane of challenges that this article touches upon, without all stakeholders of the economy and the society working together. Companies must take the first step towards an effective Regulatory Strategy that is crafted from the foreseeable challenges, and has a detailed action plan to implement the same.

The fourth and last mantra, is to have a detailed, 360 degree risk management strategy, that addresses legal & taxation liabilities, changing geopolitics, changing national and international regulations, changing user preference, changing definition of markets, products and services and of changing international dynamics.

However, the above mantras are only necessary conditions for survival and growth in the highly disruptive world. What would be required is to have the best of talent to steer a company through the choppy waters ahead. And hence, talent and leadership cannot be overemphasized as a critical requirement for managing growth in a highly disruptive world.

This article was published in BW Businessworld issue dated 'April 2, 2017' with cover story titled 'India’s Fastest Growing Companies 2017'

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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About the author

Dr Jaijit Bhattacharya

The author is Partner, Strategy and Economics, KPMG in India