CA Pragya Singh

CA Pragya SinghIntroduction:

The Government is fast moving on the tract of implementing GST from 1st July 2017. The latest step in the direction being the passage of the four legislations; CGST, IGST, UTGST and States Compensation bill by the Lok Sabha and the Rajya Sabha. This makes even more important for businesses and professionals to quick analyse their business functions like sales, procurement, cash flows, accounting systems, etc as GST is not just a makeover of the Indirect Tax Regime but a law that will definitely change the way to business.

Why Procurement Planning is a must:

Here in this article I have tried to incorporate, how GST will impact business at the procurement end and how early planning can save cost as I believe a penny saved is a penny earned! Material cost is the major direct cost that manufacturer, trader shall incur and control over these will definitely add to profit margins.

What do businesses look into while Procuring Materials:

Apart from quality, vendor response, warranties, etc, tax considerations have been one of the major aspects that businesses look into while making purchases that lead to ample savings. For illustration, consider the below under the current tax regime:

♣ Registration of the Vendor: A manufacturer may be interested to purchase from a excise registered vendor than an unregistered vendor in order to be avail the benefit of CENVAT credit. Let’s take excise duty rate of 12.5%, hence for a purchase of Rs. 1 Crore there is a direct savings of Rs. 12.5 Lakhs, as it will be available as CENVAT Credit.

♣ Interstate Vs. Local: For a dealer who is eligible for input VAT shall be interested to purchase from local vendors as CST would be a cost. Let’s take VAT rate of 14% and CST rate of 2%, hence for a purchase of Rs. 1 Crore there is a direct savings of Rs. 2 Lakhs, in the form of non payment of CST while VAT of 14 lakhs can be taken as

On the other hand, dealer a producer who is not eligible for input VAT shall be interested to purchase from interstate vendors as CST would be low than local VAT. Let’s take the case of producer of electricity. VAT of 5% and CST of 2% are charged on coal used by manufacturers of thermal electricity. As the output is not taxable, for a purchase of Rs. 1 Crore there is an additional cost of 3% by way of VAT if local purchase is made. Hence by making a interstate purchase there is a direct savings of Rs. 3Lakhs.

(Note: C forms can be issued for purchase of inputs and stores and consumables for generation or distribution of electricity or any other form of power as per Section 8 of the Central Sales Tax Act, 1956 even though the output is not taxable).

Under the GST regime, the indicative benefits stated above shall not be available due to seamless credit and hence those businesses whose procurement policies were driven by tax considerations, shall need to look again into their procurement policies.

Impact of GST:

A Few Thumbs Up:

Procurement from non Excise Dealers: Vendors other than Manufacturer, First stage and Second Stage Dealers are not eligible to pass on the credit of excise duty. Further they can avail only credit of VAT. Thus Excise Duty adds to cost of non excise registered vendors and hence leading to higher product price. Under GST, all dealers would be eligible to take credit and pass on to the buyers and hence leading to a lower price of materials.

No More CST, Entry Tax: CST at the rate of 2% was cost to all the businesses as there is no input tax credit available. Vanishing of CST will be a tremendous cost saving. Further few states charge entry tax on specified goods entered into the state. The entry tax paid is not eligible for input setoff as well. Hence it will also be a cost saving factor.

Grading of dealers: Hitherto there was no system available for businesses to verify if their vendors were tax compliant or not, which many times raised issues of reversal of CENVAT Credits by the department by treating the purchases as bogus and also led to disputes. Under GST, a new system of “GST compliance rating” will be introduced, where the registered persons shall be given a rating based on how compliant they are in making tax payments, in filing returns etc. GST compliance rating will work like CIBIL in the banking industry where borrower with good CIBIL scores is eligible for loan. Thus vendors with higher compliance rating shall be preferred over the others.

Reversal of VAT credits in case of stock transfers to other states: If local purchases are made and transferred to branch in other state, under the current tax regime, Input VAT reversal was to be done. However under GST no such reversal shall be required as the branch transfers shall also be regarded as outward supplies and GST shall be payable by the transferring office and the same shall be taken as credit by the receiving branch.

Anti-profiteering clause: The anti-profiteering clause in GST states that the benefits of the reduction of tax rate and increase input shall be passed on by the vendors to customers by way of price reduction. Thus analysing the impact of GST on your vendor can help in negotiating the price post GST.

A Few Thumbs Down:

Increase in freight cost: Due to vanishing of CST, those vendors who maintained branch offices for saving CST shall now disappear, thus procurement may need to be made from interstate, leading to increase in freight cost.

One to one credit matching & reconciliations: GST requires one to one matching and approval of transactions by the customer and vendor for availing of input. Thus in case of small and medium enterprises, there will be additional compliance cost. Further if the vendor neglects to pay taxes or file returns, it will lead to auto reversal of the credit of input.

Tax on Advances: Hitherto, there was no tax on advances given for purchase of The concept of tax on advances was only under Service Tax. Under GST, tax shall be paid on advances or purchase of goods and services as per the provisions of the time of supply. Thus it will impact the cash flows, as tax is paid on an early note.

Purchases from unregistered dealers & from dealers from composition scheme: No input shall be available for purchases made from vendors registered under composition scheme, however the vendor shall take the tax as part of its cost and thus purchase from vendors opting for composition scheme may not be lucrative.

Further purchase of goods from unregistered vendors, will increase the compliance cost as tax will need to be paid by the businesses under reverse charge. However input shall be available.

Last minute Rates Rush: The nation is eagerly looking at the revolutionary GST, expected to be applicable from 1st July 2017, however the rates of the goods and services at which they shall be taxed are not yet released and are set for discussion between 18th 49th May 2017, which effectively means the rates will be a surprise just a month ahead of the BIG CHANGE, providing less time to combat with impacts of change in tax rates.

What is it that you can do?

Analyse the impact of GST on the business of your major vendors to get to know the areas where there could be possible savings to them and incorporate that as part of negotiations with the vendor

Revise your purchase budgets and plan your working capital. If under GST the price is expected to be increased, then an immediate planning for meeting the additional working capital will need to be made

Further, if the prices of the products are expected to be increased in the GST regime, and such increase is higher than the carrying cost of the inventory, then purchases can be made in advance, on the other hand if it is expected to decrease then purchases could be postponed.

Planning of transitional phase will be very important. For example, if a machine is to be purchased from interstate vendor during the month of June and if it is possible to postpone the purchase considering the business needs, then purchase could be made post GST so as to save the CST of 2%.

Planning what type of input credit (CGST/SGST/IGST) shall be an important factor under dual GST as credit of IGST is available against all, however inter adjustment of CGST and SGST is not available.

Tax on Advances: Hitherto, there was no tax on advances given for purchase of The concept of tax on advances was only under Service Tax. Under GST, tax shall be paid on advances or purchase of goods and services as per the provisions of the time of supply. Thus it will impact the cash flows, as tax is paid on an early note.

Purchases from unregistered dealers & from dealers from composition scheme: No input shall be available for purchases made from vendors registered under composition scheme, however the vendor shall take the tax as part of its cost and thus purchase from vendors opting for composition scheme may not be lucrative.

Vendor Masters and Tax Masters need to be updated. This is the foremost and comprehensive task.

Training of employees to understand the basics of GST and setting up of system for periodic reconciliation with the vendor to avoid last minute mismatches.

Conclusion:

GST will impact businesses manifold and the actions prescribed above are illustrative. Likewise many business functions will need to be analysed and planned to avoid from the jitters of GST post implementation.

Disclaimer: This compilation is for easy understanding of the readers and is not any professional advice. For your business specific GST impacts, kindly contact your consultant.

The Author is a Chartered Accountant based in Chennai and can be reached at pragyasingh146@gmail.com

Links to Download Four GST Bill Passed in Lok Sabha

Year Bill No. Short Title As Introduced in Lok Sabha As Passed in Lok Sabha
Date 27/03/2017 29/03/2017
2017 60 The Goods and Services Tax (Compensation to States) Bill, 2017 Download Download
2017 59 The Union Territory Goods and Services Tax Bill, 2017, Download Download
2017 58 The Integrated Goods and Services Tax Bill, 2017. Download Download
2017 57 The Central Goods and Services Tax Bill, 2017 Download Download

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6 responses to “Procurement Planning for GST”

  1. Mrityunjoy says:

    Good

  2. Rajesh says:

    A nicely compiled article Pragya. By any chance, do you have an idea as to what all changes will be required to upgrade any existing software which is run by any manufacturing business unit having manufacturing plants at different locations in India.

  3. Sandeep Kothari says:

    Good article.

  4. Tarunkumar D trivedi(Advoace) says:

    Really your article is excellent one. It shows you deep study on subject. I congratulate you.

  5. SURESH AH says:

    Your analysis are very good medam, and the Article was so nicely narrated.

  6. CA Rahul says:

    Very nicely written

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