Rethinking Business: Impact of the GST on Working Capital

The Goods and Services Tax (GST) will be one of the decisive factors for our economy in the coming years. It aims to put an end to the woes of an indirect taxation system, but many of the clauses of the model law point towards rising business costs. It also predicts a need to reconsider business operations. You may very well have to rethink your pricing, profit margins, working capital and business costs.

You will have to strategise your business expenses around the various tax and regulatory changes, due to the presence of a multiple taxes in consideration as part of GST and otherwise. “Many companies are grappling with the impact on working capital. Consider how it would impact a chemical major, which imports 80 percent of its raw material. Currently, it pays Customs Duty of 14 per cent (countervailing duty and special additional duty). But if import GST is 18 percent, its working capital requirement could go up significantly” said Pratik Jain, executive director, KPMG India.

We will go through the expected impacts on the working capitals of businesses and the factors that could drive their financing strategies – business expenses, product or service pricing and profit margins.

Business Expenses

The change in your business expenses will depend on the operating costs and profits margins. There are two changes in taxation that you should be aware of:

• GST will bring into force an increased tax rate – a uniform one subsuming the existing variety such as CST, Excise Duty, etc.

• You have to pay GST every month as compared quarterly system in the existing taxation.

Price changes will be required but how you handle the competitive market will influence your market shares. You have to evaluate your finances on a monthly basis to understand the full effect of GST. Here are a few pricing aspects that you need to rethink once GST comes into effect.

• Impact on change in selling price of products at various levels of consumer pricing and dealer margins

• Impact on the market

• Impact on business locations and divisions basis operation costs and revenues

These will help you evaluate working capital requirements and help you set pricing strategies according. Streamline your profits towards focused markets to evaluate the full impact of GST.

Product or Service Pricing

Pricing products or services for wholesale and service business is dependent on manufacturing costs, and this is about to change with GST. The GST will do away with the multiple taxes applicable while sourcing or transporting products. “The distinction between Goods and Services will be reduced gradually, thereby making tax compliances easier,” says R Narayan, Founder and CEO, Power 2SME. Hence, the cost of manufacture or cost incurred for the services determine the GST chargeable on the consumer.

You can now build a new strategy for your inventory based on consumer proximity, rather than tax restrictions. You may also not require building warehouses anymore in states with tax benefits as there will be balanced taxation system. Commenting on the situation, Satya Poddar, partner, Ernst &Young, said “Right now, people try to ensure that goods come with as little tax as possible. Once GST comes, the timing and place of procurement will change.”

Here are a few transitions you may have to consider:

• A new strategy for warehouse locations to cut down on logistics expenses because tax restrictions will be neutralised

• Redesigning warehouses to focus on optimising storage since tax benefits on smaller units will be done away with

• Reconsider pricing and contracted service requirements in the manufacturing process as pricing will change with the introduction of GST

Profit Margins

The final step in analysing the changes required in your working capital is examining your profit margins. You have to optimise your margins to sync with your business expenses and pricing. You need to review your approach to procurement because vendor margins will have to be kept in mind as the standard GST rate is expected to be 18%. You can boost your profits as well, if you can correctly retrace profit margins.

GST implementation can impact your working capital for a few months, but how quickly you evaluate the changes will determine you smoothly you adapt your business to the new market. Evaluating your working capital needs will be one of the first steps of change after GST and you can be assured in times of market changes as well with available resources.