It’s been a quarter since GST, the much awaited economic reform, was rolled out. While it’s too early to decipher a clear trend in tax collection, collections exceeding RS 90,000 crore in July and August notwithstanding, the initial impact on businesses and economy is worth a study.
Sourcing Hardware reached out to stalwarts of the industry – Bantwal Ramesh Baliga, CEO, Watertec (India); Kaustubh Roplekar, CFO, Racold Thermo; Atul Borkar, senior VP & business head, Ion Exchange – to get their perspective on how GST has impacted their business, industry, and the economy in general.
By Gyanendra Kumar Kashyap
Impact on Business
How has GST impacted your business? What steps did you take to make the most of GST?
Baliga, Watertec : The economic reform with respect to GST has had a very positive impact on our business. We have prepared a complete outline of GST implementation across our 31 branches. We have worked on our pricing structure, reworked dealer entitlements and warehousing; our logistics have been set to make maximum use of the benefits to the company as well to end consumers.
Borkar, Ion Exchange: GST has negatively impacted our business. Our RO sales were affected more than other product portfolios due overall slowdown in the market. However, consumer spending needs to improve to get the benefits of GST, since any industry survives on top-line as well as bottom-line.
Roplekar, Racold: The implementation of GST has set off a transformational shift from a complex multi-layered indirect taxation system to a uniform indirect taxation system. For us in the consumer durables space, the GST rates are now in the highest slab of 28% as against an average rate of ~22% in the pre-GST era. We like other players in the industry have initiated changes in our product prices.
How did you work with your business partners (vendors, dealers, distributors, etc) to streamline the process? What were the challenges?
Baliga, Watertec: We never faced any problem with our vendors, distributors or dealers to streamline the process. Most of our vendors are GST compliant companies; our dealers and distributors were in fact waiting for GST to be implemented.
The challenges were the HSN codes which were differing and that needed to be streamlined and properly explained to the dealers/distributors. The company resolved all the GST implications and the dealers and distributors found it quite acceptable, as did our customers.
Borkar, Ion Exchange: We started GST preparation 45 days before the rollout wherein we started registering the GSTIN numbers in our system. We did not face much of a challenge in this. However, misunderstanding about GST affected the market sentiment which ultimately affected the business.
Roplekar, Racold: We had embarked early on the journey of transitioning to the new regime. We have implemented changes in our ERP systems, pricing for our products, and the making our channel partners aware about compliance as well as the IT readiness to be initiated on their part. In spite of this, there is a large component of the value chain which still does not seem to be GST ready. But the additional two-month window given by the government for uploading data to the GSTN portal is certainly helping the people who were still in a state of confusion and uncertainty.
How robust is the technology back-end in your company and which partners/technology suppliers are your working with? How well-placed were your business partners on the technology front?
Baliga, Watertec: We are working with the most updated SAP technology. Most of the business partners have almost been ready for the implementation. We did not provide them any training but lots of interaction and explanation was provided through our teams.
Borkar, Ion Exchange: As for Ion Exchange, we work on an in-house ERP and the GST software changes happened at a relatively rapid pace. Our business partners were supported by their IT firms in implementing the GST patches, so we hardly came across any issues.
Roplekar, Racold: We use SAP as our ERP. SAP has released most of the pertinent patches to the existing system to gear up for GST. We have also collaborated with external consultants for the purpose of ASP/GSP in order to avail the benefits of the advanced technology.
Most of the larger channel partners have already communicated to us their GST registration numbers, and we are confident that they would have made the necessary upgradation to their IT ERP and tax systems to comply with GST requirements. We had already secured the requisite GST registrations, and the necessary ERP system changes are in place to ensure that business ran smoothly from 1st July. We engaged with our vendors and customers through continuous mail communications and meetings in order to ensure that the transition was smoothened.
How will your logistics (transport, warehousing) be impacted by GST, if at all?
Baliga, Watertec: Logistics and warehousing would indeed be impacted by GST. But our business is oriented more towards immediate delivery and availability of material, hence we aim to continue with our warehouses and the impact is borne by the company. As we are a customer-centric company, we always work towards reaching the consumers on time, and we have worked out a clear flow chart of transportation and warehousing.
Borkar, Ion Exchange: Although it is difficult to assess the benefits on short term basis, reduction in state level warehouses will reap benefits for us. However, we need to be cautious while taking these steps since state level warehouses provide better serviceability to the market. Also, abolition of local entry taxes and forms is helping the seamless movement of goods across India.
Roplekar, Racold: We have a planned reorganisation of warehouses in order to suit the business requirements owing to introduction of IGST, which has enabled seamless credits.
What will be the mid to long-term impact on your business? Do you feel that strong brands stand to benefit under GST?
Baliga, Watertec: We have seen a good mid-term impact, wherein the sales have grown by a considerable percentage Y-o-Y. All the strong brands in the country that have the right business ethics and sales policies will be benefitted to the maximum. Our retail partners have considerably improved their sales in last two months of implementation.
Borkar, Ion Exchange: The mid-term impact is negative, since there has been substantial destocking and a money crunch has been created in the market. However, in the long term it will reduce raw material cost (taxation portion), which should help all sizes of ethical organisations in the same way.
Roplekar, Racold: Yes, strong brands do tend to benefit from the onset of GST as they are able to better avail and pass on the benefits of GST credit. They will also have the necessary infrastructure for implementation and compliance with GST.
What are your expansion plans for the coming months?
Baliga, Watertec: We are now represented in each state pan-India. We have also expanded and consolidated our huge network and now our products are available in tier I, II, III cities, and in almost all the rural markets in the country. We are also benefitted by the affordable housing policy of the central government which is likely to have a good impact on our growth. Watertec India will be shortly launching many new innovative products for the polymer industry in both mid-end and mid high-end markets. We are also working on export markets like SAARC countries, UAE and Africa, which have a huge potential for our manufactured products.
Borkar, Ion Exchange: When the going gets tough, the tough get going. We launched two new models of softeners which are suitable for apartments. Also we launched the new model of Under the Sink (UTS) RO with ESS technology. These two products will open up a new segment of customers for us. We will continue our focus on sanitary counters for water treatment products, and on kitchen studios for drinking water solutions. Some product introductions are also on the anvil in coming months.
Impact on Industry
In your view how has GST impacted your industry? What are the key concerns?
Baliga, Watertec: The impact of GST in the industry has been quite good, except for certain grey areas. The key concern is the 28% rate of GST on sanitary items. This should be restricted to at most 18% and for rural businesses it should be subsidised. This issue is yet to be addressed by the government. The affordable segment will take a beating in case sanitaryware products are treated as luxury and taxed at 28%.
Borkar, Ion Exchange: There has been a short term negative impact. However, I feel that the industry has got fair treatment in the GST regime.
Roplekar, Racold: Manufacturers, suppliers, sellers, vendors, and service providers who have most efficient last mile input to output chain mechanism shall be able to maximise benefits from the GST regime. Having said that, due to invoice-to-invoice uploading on servers by crores of people on a daily basis, there will be a huge load on infrastructure. Is the GSTN portal ready for the same? Also, this shall definitely mean increase in compliance costs for all as there will be increased consultancy, manpower, bandwidth, paper work, compliance check requirements, etc.
What do you suggest should be done to make implementation of the reform seamless and all encompassing?
Baliga, Watertec: The government has indeed given time to the industry to understand the model of implementation, but it would still take a couple of months more before we can settle down and see the real benefits. After all we are a diverse country with many regions and states. Besides, the government should involve companies which can give their views on reforms, before their implementation. We also believe that there should be a single tax structure for the bath fittings industry.
Borkar, Ion Exchange: As we file our returns, we will get to know the robustness of the software system. Also, there is a big relief due to seamless transportation of goods.
Roplekar, Racold: For GST to be fully successful, it is very much important for all units in a value chain to align themselves towards accurate records and compliance.
What benefits do you foresee for the industry in the mid to long term?
Baliga, Watertec: The industry as a whole has been under the influence of the un-organised sector and cheap foreign imports. GST implementation has reduced this space of the business. The unorganised segment now has to fall in line, and that would make business more ethical and eventually benefit the customer. In that sense the size of the markets will greatly increase for everyone. There is going to be some short term pain for companies in the unorganised segment, since they are still trying to understand the system and work out the benefits.
Borkar, Ion Exchange: Our industry will be benefited just like other industries.
Roplekar, Racold: Over a longer period, once the real nature of seamless credits begins to flow throughout the industry and the value chain, the real changes in the consumer prices will be felt. This will lead to a reduction in cost for the ultimate consumer in the mid to long term.
What are your views on the rate structure, and what suggestions do you have for rate rationalisation?
Baliga, Watertec: As I said earlier the rate structure on sanitaryware items, of 28%, is way too high. Bathrooms and sanitation are not a luxury for the common man. The taxation should be uniform and rate should be within 18%. We should have a rationalised tax structure rather than a dual structure in the same bathroom. High taxes on luxurious bathrooms are justified only where affordability by the customer is not an issue.
Roplekar, Racold: While most of the rates for essential goods are kept at 0% to 5%, we feel that there is still scope for reduction in rates for certain products, like consumer durables which cannot be said to be luxury or demerit goods. There is also scope for a rationalisation for services from 18% to a lower percentage.
Do you feel GST will have an impact on the nature of competition?
Baliga, Watertec: Of course. The impact would be felt more by companies that sell unbranded products and who compete with bigger brands. The difference of pricing will now narrow down. This will force all brands to supply only quality products in the market.
Do you think there will be some kind of consolidation in the industry, going forward?
Baliga, Watertec: Consolidation, in the form of bigger companies acquiring smaller ones, is a healthy sign and the industry needs such consolidation. Brands focusing on innovation and quality would always be the leader.
Impact on Economy
Post demonetisation, economic growth witnessed a slowdown. Was this the right time to go ahead with GST?
Baliga, Watertec: Yes it was the right time, as GST was expected to be introduced. Demonetisation has been a tough measure and it has caused some short time pain. It is a radical change and it will take some time for things to stabilise.
Borkar, Ion Exchange: The slowdown was quite expected. I feel that any time is a good time to implement a good reform.
Roplekar, Racold: In the long run, GST will turn out to be favourable. Stating a correct time for implementation of such a mammoth reform cannot be termed as right or wrong. Although this has affected growth in the short term, we cannot say that it was a wrong time to bring in GST.
How has the implementation of the reform been on ground?
Baliga, Watertec: It has taken off, but it will definitely take time for the people to understand the need of such reforms. We are sure that by the year end we will begin to see a positive impact on our economy.
Roplekar, Racold:There is a mixed reaction for the implementation of GST post 1st July 2017. Some have to face a lot of issues; others like us implemented the GST quite smoothly. But, the effort and cost of compliance has increased.
In your view how are demonetisation and GST together changing the dynamics of Indian economy?
Baliga, Watertec: India has always run on the parallel economy, which represents unaccounted cash generated by avoiding taxes, duties, etc. Demonetisation has helped the economy to go cashless to a large extent, and GST is helping the country move towards a formal, less-cash system, and drawing more players into the tax net. We can clearly see more people paying taxes now, and this will greatly improve our economy, our GDP in the coming years. Eventually implementing a single tax system should be the goal of our policy makers.
Borkar, Ion Exchange: Demonetisation was a failure. However, GST can change the dynamics of business if implemented in the right spirit and proactively.
Roplekar, Racold: GST and demonetisation are two bold decisions taken by the government to tackle existent issues, and to resolve the issues which arise day by day in the economy. GST and demonetisation are likely to be described as game changers of the Indian economy. GST will require companies to not just be tax compliant but also readjust their structure and supply chain networks. On the other hand demonetisation is leading to a boom in cashless payments. These two will render great opportunities for customers to relook their structure and redesign their supply chains, since the current supply chain has been designed according to interstate taxation. However, in the long run, demonetisation and GST could result in a wider tax base and greater participation in the formal economy. This should benefit India’s business climate and financial system in the long run.
How will the economy as a whole benefit from GST, and other reforms being brought about by the government? Which specific reform or scheme is likely to impact your business or industry?
Baliga, Watertec: Needless to say that reforms brought in by governments are in the interest of the country and the industry has to work towards making them successful. I would particularly like to underline the affordable housing initiative. It would be a great benefit to our industry, and of course to the entire country in terms of its objective of ‘housing for everyone’. The success of this initiative will definitely give a big boost to business activity, and we have already geared up to manufacture a range of affordable products.
Roplekar, Racold: A seamless flow of credit for taxes will lead to a reduction in prices for the ultimate consumer in the long run. Increased automation will lead to better documentation, efficient accounting practices, and real time assessments for GST. This will be a welcome boon to all industries.