The Impact of Indirect Tax Reforms on Supply Chain Management
Priyanka Sinha
by Priyanka Sinha
Globally, supply chains continue to grow, and one of the factors driving this change is the transformation of indirect taxes including VAT and GST, as well as excise and tariff duties. These reforms, looking to improve the structural taxation mechanisms in order to better the economy, change the ways in which businesses organize their supply chains.
Reducing supply chain complexity with tax reforms
Indirect tax reforms seek to simplify structures as well as overcome the problems of tax on tax, which has affected supply chain decisions. For example, with the introduction of GST in India, companies do not have to design their supply chains based on tax considerations. The Removal of these so-called hidden taxes has allowed businesses to concentrate on operational efficacy and the enhancement of procurement, warehousing and distribution processes.
Cash flow and compliance
The introduction of indirect taxes greatly alters the way in which businesses must manage cash. For instance, the introduction of an input tax credit (ITC) helps businesses to recover the GST which they paid on their production inputs against the GST on sales. It is important to note that delays in submitting GST refund claims or differences when reporting GST sometimes lead to cash flow bottlenecks. As such, companies are expected to maintain proper documentation and cooperation with the tax authorities in order to secure a reimbursement in the shortest time possible. Moreover, the wider adoption of e-invoicing and electronic reporting is forcing organizations to procure new solutions to handle their tax data efficiently.
Cross-border trade and customs duties
Customs duties still play a vital role in global supply chain systems and processes. Recent tax reforms such as the implementation of free trade agreements and reduction of the tariff rate have made cross-border trade easier by simplifying the movement of goods. However, indirect tax issues need to be addressed with care and due diligence in order not to incur further costs or delays.
Strategic implications for business
For most corporations, tax reforms go beyond legalities or compliance; they offer strategic benefits. Companies that optimise their deciduous supply chains such that they are geometrically arranged towards tax-efficient structures are able to incur lower costs, boost the flow of cash, and improve net incomes. This means the companies in question will have to strategically decide where to procure raw materials, where to put up storage facilities and where to set up production plants in order to take advantage of lower tax rates.
Conclusion
Indirect tax reforms are changing global supply chains and opening up opportunities for businesses to embrace efficiency and cost changes. As these developments progress in the companies, attention must be paid to strategic aspects such as compliance, cash flow, and planning. Companies that make a proactive adjustment to a change in tax jurisdiction will be able to more effectively operate in the modern economy, which is increasingly bordering on globalization.
Priyanka Sinha is Senior Manager- Indirect Tax, Goods and Services Tax & Global Trade with RNM India. Contact Priyanka.
Established in 2009, RNM Capital Advisors (RNM) is a mid-market focused boutique investment banking firm. RNM provides advisory services to its clients across sectors and geographies in the area of mergers & acquisitions, joint ventures/collaborations, fund mobilisation, restructuring & turnaround, valuations, due diligence, India entry, family office, alternative investments and other allied corporate finance matters.
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