August was an important month for tax reform in India. The Constitutional Amendment Bill on the Goods and Services Tax (GST) was passed in Parliament, ratified by the states, and given the President’s assent. Going forward, we expect to get more clarity on important details like rates, exemptions, and rules as the GST Council is formed.
The GST is the talk of the town in India. My conversations with executives on-the-ground during a recent trip to Mumbai and Delhi were revealing. Many multinationals have started preparing their back-end systems for a transition to the new tax but, more interestingly, many are now using the tax to re-evaluate their India plan and make important strategic decisions.
The most notable of these is around pricing. The GST will consolidate all current indirect taxes, which will result in a higher one-time tax payable (expected to be in the range of 18 – 20%).
The decision that is top of mind for executives is whether this increase in tax will be passed on to the final consumers and, if it will, how much of it will be transferred. This is a crucial decision for MNCs as the Indian consumer is extremely price-sensitive and affordability remains a challenge in the Indian market. Many MNCs are evaluating how competitors and others in the industry are making these decisions. Finding the optimal price—one that balances the increased tax cost without giving up market share—is critical.
Some executives are looking to their supply chains to help make this decision. One of the benefits of the GST is that it will lead to a more efficient logistics. Multinationals are therefore evaluating the gains from supply chain and tax efficiencies to gauge how much of the increased tax cost they can offset with increased supply chain efficiencies without affecting margins.
These changes in the supply chain are also helping executives re-evaluate their distribution strategies in India. An FSG survey revealed that multinationals use, on average, 70 distributors in India, more than double the APAC average of 32. The main reason for this is because the regulations in India necessitate small, state-level distributors. Companies in India are therefore looking to consolidate their channel structure as the GST is implemented, reducing the number of distributors they use, and focusing on regional distributors.
As the country progresses toward a new tax regime, conducting an impact analysis of the GST on your business – and being cognizant of the strategic decisions that need to be made as a result – will be crucial in preparing for a successful transition.