We’re a week into the implementation of the GST, India’s biggest tax reform in decades, and many businesses are struggling with the transition. Multinationals should already be taking the urgent steps I highlighted in my previous post to reduce the short-term costs of a mismanaged transition. Looking ahead to the next several months, executives would be well advised to build on these steps by thinking critically about some of the more lasting implications of the GST:
- The first things to analyze in the months following implementation are cash flow and working capital requirements. The new tax will compel companies to think through any changes in working capital, and will require them to communicate the same effectively to corporate. Executives should use the GST as an opportunity to establish more rigorous practices surrounding working capital management and sales forecasting to enhance operational performance.
- Multinationals should also use the GST as an opportunity to work more closely with their distributors and train them on managing working capital and cash flow more efficiently as a response to the new tax. This will allow companies to get deeper insight into their distributors’ internal processes and financial stability.
- Companies—particularly multinational companies—should expect to face increased scrutiny of books by the tax officials. This is because of the introduction of the Anti-Profiteering clause in the GST. This clause dictates that companies pass on any benefits from lower tax rates or input tax credits to consumers through lower prices. The government has gone so far as to establish a National Anti-Profiteering Authority (NAPA) to make sure that companies adhere to this clause. While details of how the government will ensure compliance are still unclear, it’s safe to say that this stipulation further complicates an already complex tax system.
- Executives should also develop a thorough understanding of the changes in tax and its impact on their businesses so that they can have an open and honest discussion with customers and local partners. This is because many multinationals are feeling pricing pressures from their customers due to the Anti-Profiteering clause. Customers are attempting to renegotiate contracts and change margin terms and prices to pass on benefits of the new tax, despite the lack of clarity surrounding the tangible benefits.
Even though the GST will have medium- to long-term benefits for the economy, MNCs will incur higher costs in the coming months because of its messy implementation. Executives should expect a short-term disruption in economic activity and ensure internal alignment on the impact of the new tax.
This analysis is the second post of a two-part series on preparing for an effective transition to the GST. To read part one, please click here.
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