Mumbai: At close of business on 30 June, after all sales have been registered and all stocks accounted for, Marico Ltd will switch off its enterprise resource planning (ERP) system.
The following morning, the company, as indeed all India will wake up to a new indirect-tax regime, one that replaces multiple taxes across Indian states with a far simpler tax structure, the goods and services tax (GST).
Marico will have to file taxes under the GST regime and plans to go live with its new business software on 4 July. The man in charge, Mukesh Kripalani, chief officer—business process and information technology (IT), hopes that the transition will be smooth. It may not be that simple.
For the past month-and-a-half, Kripalani and his team have been working hard, through nights, and over weekends, to ensure Marico’s IT systems are ready for the switch-over. They have conducted trials and simulations, trained vendors, sales staff and distributors.
They have created detailed standard operating procedures (SOPs) and handed them around to everyone involved. They have set up a call centre and widely disseminated the numbers.
And, just in case something goes wrong, they have mapped out contingency measures. The worst-case scenario, according to Kripalani: The system doesn’t work, crashes, and sales transactions involving 850 distributors have to be manually entered.
“That is just not an option,” says Saugata Gupta, managing director and chief executive officer, Marico.
A back-of-the-envelope calculation—Marico had annual revenue of Rs4,600 crore in 2016-17—would mean an accounting backlog of roughly Rs12-13 crore for one day of disruption, says Vivek Karve, chief financial officer, Marico. He expects teething trouble but not a crisis.
The switch-over itself is a 15-minute procedure, but it involves 850 distributors and around 3,000 vendors from around the country.
It is a switch-over the maker of Parachute and Saffola oils has been waiting for and dreading in equal measure.
The journey to GST
GST has been in the making for the last 17 years, but it was only in May 2015, after the Lok Sabha passed the GST Bill that Marico, much like other companies, started work on the transition.
Big companies have been big supporters of GST and for good reason: It unifies the Indian market, taxes final consumption and not intermediate goods, and holds forth the promise of easier compliance. The government hopes GST will make it easier to do business in India and push the country up the World Bank’s Doing Business Rankings (it is currently at 130, out of 190 countries ranked). And then, there is the expectation that the efficiency of the new tax regime will add as much as 1-2 percentage points to the country’s growth rate.
In May 2015, Marico identified the areas that would get affected by putting together a task force comprising people across functions—from finance, procurement and supply chain to sales and IT. CFO Karve was put in charge.
What began as a marathon has spiralled into a sprint over the past few months—“a battle against time”, as Karve describes it.
The reason: Clarity over rates, rules, and the implementation have only emerged over the past six months.
“The intensity of work increased once the definitiveness came in,” says Jitendra Mahajan, chief supply chain officer.
GST affects every node of the so-called value chain at companies. At Marico, this meant understanding what it meant for buying from farmers or other suppliers at one end, and what it meant at the point of sale to the end user (or consumer) at the other end.
And so, Marico set out to understand how GST would affect its transactions with farmers, vendors, media services companies, and trade partners (distributors, stockists, wholesalers and retailers). “Getting ready for GST meant that this entire ecosystem was ready for the transition as well,” explains Pawan Agarwal, head, finance, Marico.
To that end, the task force had its work cut out.
For Kripalani, IT preparedness meant three things. First, getting the company ready internally, which meant working with its IT partners such as business software company SAP SE on the ERP. Second, ensuring that everything would work as usual in terms of sales and purchases. At the sales end, the distributors are on the distributor management system (DMS) and the IT team had to coordinate with another set of software providers to make sure the distributors’ systems were upgraded and integrated with the company’s. Third, Marico had to make sure the vendors from whom it bought raw materials or that serviced it (even in terms of media buying) were registered and their systems aligned with the company’s.
For chief supply chain officer Mahajan and his team, the basic task at hand was to create awareness. “Our job was to take care of small and medium enterprises (supplying to Marico), as well as farmers, to educate them about GST and its impact,” says Mahajan.
For instance, Marico sources coconut and copra (desiccated coconut), a key raw material, from farmers. Coconut was tax-free in the old value-added tax, or VAT, regime. Now, large farmers who have sales of at least Rs20 lakh a year will have to pay GST of 5%. These large farmers had to be registered on the GST network and trained to function on a digitized system, says Mahajan.
At the distributor’s end, it is critical that companies such as Marico build up inventories in the trade channel that have been thinning in the weeks to 1 July.
“Normally retailers carry 20-30 days of stock in the system and hence there isn’t any consumption loss. However, if in the next 15 days the pipeline isn’t refilled, then there will be a consumption loss somewhere,” says MD Gupta. The company, through its network of distributors and stockists reaches about 3.5 million to 4 million kirana (or corner) stores across the country.
Meanwhile, clarifications from the government continue to come in. For instance, until 10 days ago there was no clarity on whether goods manufactured at excise free zones would continue to be exempt from taxes. It has now been agreed that the government will pay back 58% of the central GST liability and the balance will have to be borne by the company, says Karve.
The complex nature of the GST with four tax slabs ranging from 5% to 28% is bound to attract a lot of lawsuits due to classification issues, a Bloomberg report dated 28 June said, although Marico itself appears to be clear about the classification of all its raw materials and goods. Cooking oils, which includes its Parachute coconut oil and Saffola, fall in the 5% slab. Value-added hair oils are in the 18% slab and its personal care portfolio which includes brands such as Set Wet and Livon will be taxed at 28%.
The GST system
Under GST, Marico will have to file each and every transaction—by vendors and by distributors. This is a change from the state-level tax filings allowed under the VAT regime.
The GST system works on credits, allowing for greater transparency. Hence, for Marico to offset its input credits, the previous entity in the chain (vendors in the case of Marico) has to be GST-compliant. Currently, 90% of Marico’s vendors are prepared for GST, says finance head Agarwal.
The system also allows for buying from unregistered users. However, in such instances, Marico will have to create a dummy tax credit for purchases from an unregistered seller. This will help the state know the quantum of tax that it’s not getting (on account of an unregistered seller), says Agarwal. This tax will be refunded to the company.
Retailers and vendors with income of less than Rs20 lakh per annum don’t require to be registered and can continue to work outside the GST regime. And those with income between Rs20 lakh and Rs75 lakh can choose the so-called GST composition scheme. Under this scheme, only 1% of their turnover has to be paid as tax.
At the billing level, GST is a lot more complicated. State, centre and intra-state transactions have to reflect on the bill. The invoice has to carry a summary of the number of items under each tax slab that are being sold. It has to reflect the harmonized system nomenclature (HSN) or the master item code which is a universal code, says Kripalani. Every transaction has to be filed, reconciled and finalized every month along with vendors and distributors to ensure the relevant tax credits.
The distributor conundrum
At the front-end, most distributors (even retailers) have been getting rid of inventories for the past month.
“Even though, a few of the companies like us have gone ahead and communicated that we will take care of tax differential on closing stocks, they would still want to play safe by downstocking rather than having to deal with tax vagaries later on. So general tendency will be to downstock,” says Agarwal.
In some cases, stocks at the trade level are down 40-50% he adds.
Another concern for distributors is margins.
However for Marico, distributors are guaranteed a 5% margin or 24% return on investment. Hence even if there is a change in the tax, distributors need not worry, says Agarwal, who finds the rates largely neutral and in some cases, positive for Marico.
Some pain for some gain
Some prices will come down, benefiting the consumer, says Karve. He also expects GST to be beneficial in the mid-to-long term for the company. In the long term, prices will come down due to the creditable nature of taxes, he explained.
Companies such as Marico can also expect to gain from the optimization of logistics and warehousing; they no longer need to have depots in every state because it will now not cost it anything (in terms of tax) to move goods from one state to another. Marico, for instance, is already looking at one large depot in Haryana which will serve the four northern states. Over time, there will also be a consolidation in terms of vendors (and a move to more vendors in the organized sector), which will benefit the company, says Karve.