Sourcing managers will play a critical role in India’s new indirect tax regime 

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By: Sakthi Prasad -- Content Manager

08 August, 2016

Sourcing managers will play a critical role in India’s new indirect tax regime 
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In collaboration with Dilip Kumar J and Swetha Lepakshi -- Senior Research Analysts

On Aug 3, the upper house of India’s parliament passed a bill to overhaul myriad of indirect taxes, in what could be termed as the biggest reform since the country’s independence almost seven decades ago.

The new reform, commonly known as the GST (Goods and Services Tax), is not only about tax restructuring, but will also enable the transformation of supply chains in the country.

Under the new GST regime, businesses would require setting up new IT systems, train accountants and also figure out how best to take advantage of logistics and transportation activities, which is expected to be significantly impacted.  

Procurement organization’s role becomes critical when a company embarks on such a business transformation. Firstly, the new tax regime will alter the prices of goods and services, and this would require sourcing managers to open negotiations with suppliers in order to capture the best possible price. Budget planning and coordination with various internal stakeholders on service assessment is the key.

Secondly, depending upon the complexity of a company’s operations, management and IT consultancy firms will need to be engaged so as to reconfigure internal IT systems and processes.

There are predominantly three sourcing models in the management consultancy sector:

Description

Sourcing Models

Sourcing Practices

Sourcing services at a country level, where each country has its own set of consulting firms catering to their consulting requirement.

Country Level Sourcing

Organizations usually go for boutique firms to reduce cost.

 

However, for projects with complexity, such as change management, strategy and tax advisory, companies should go for tier-1 consulting firms through global sourcing, as quality and global presence are important.

 

Hence, depending on the complexity, criticality, and their own involvement in the project, companies can chose between global or regional boutique firms.

Consulting services are sourced at the regional level.

Regional Sourcing

Consulting services are sourced at the global level.

Global Sourcing

 

And companies can adopt either single supplier or multiple supplier sourcing strategies:

Single Supplier (Consulting and Implementation): Under this method, consulting services are sourced from a single supplier for both advisory and implementation.

Implications: 1) Buyers have better negotiation power; 2) Implementation of advice is much efficient when it is done by the same supplier

Multiple Suppliers (Separate Suppliers for Consultation and Implementation): Under this method, consulting services are sourced from multiple suppliers. Advice is sourced from one firm and the execution of that advice is implemented by another firm.

Implications: 1) Different approach from the suppliers brings in more innovation; 2) Lack of continuity in the process; 3) Negotiation power is less for buyers.

Impact on Logistics and Warehousing sector

Once a consultant is selected, companies will implement necessary IT systems in place to manage its accounting and taxation process. However, procurement organizations will also play a big role in logistics and warehousing activities because sourcing strategy would undergo a big change.

When it comes to sourcing of logisitcs and warehousing services, manufacturing companies in India usually design their plan in order to take advantage of disparate tax system that is currently prevalent across the country.

In case of trucking service procurement, manufacturers currently engage with regional players who generate invoices specific to the region of distribution. In this scenario, a manufacturer would handle large number of invoices with ample scope for errors and confusion.

As is evident in the present day scenario, operational efficiency usually rank down the pecking order. However, this won’t be the case once the new tax regime comes into play.

The new tax regime will propel companies to chase operational efficiencies instead of putting in efforts to take advantage of differential tax system. And as a result, the number of smaller warehouses are expected to reduce by about one-third – thanks to a consolidated warehouse strategy that will lead to setting up of bigger warehouse facilities close to manufacturing locations. This would necessitate procurement teams to begin looking for new facilities across the length and breadth of the country.

As for logistics, category managers working for major manufacturing firms can look to engage with a transport service provider having a pan-India presence. This will reduce the volume of regional invoicing and payments.

Logistics cost is expected to decrease by 1-2 percent within two years after implementation of GST. However, shippers can expect a slight increase in secondary transportation cost due to a possible implementation of hub and spoke model for distribution of goods.

After GST is implemented, Indian logistics and warehousing industry has the potential to transform into an organized sector. New investments will flow in for setting up of advanced warehouse facilities and also for upgrading of transport fleet. Supply landscape will undergo a transformation as suppliers would invest in modernizing their service offerings.

 




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