[CJP Insights] GST and its Ramifications for HR



So finally the GST Constitution Amendment bill sailed through the Rajya Sabha with a thumping majority of 197-0.

The manner in which the Modi government pulled off a political détente , coaxing a defiant Congress, playing the selective ‘give and take’ to clinch the deal was itself a case study for HR. Implementing tough measures such as giving up on its ego, asking the vocal Venkaiah Naidu to get go of Parliamentary Affairs ministry and  reaching out to Opposition parties, big and small alike

With the GST breakthrough, India finally joins the list of 160 plus countries that are implementing GST. It is touted as one of the biggest reforms after Manmohan Singh unleashed economic liberalisation in the year 1991

The Government is committed to introduce GST by 1st April 2017, and your company would need to immediately begin a proactive planning with a time bound action plan

GST will have a far reaching impact on almost all the aspects of the business, pricing of products and services; supply chain optimization; IT, accounting and tax compliance systems.


Depending on the operating geographies, size and sector, the scope would vary and HR will play a major role in facilitating people resources for the effective implementation of the transition roadmap.

Manpower Planning


Sourcing, Logistics and Distribution

One common market will bring down the number of depots in the country. Now that Inter-State procurement could prove viable, this may open opportunities to consolidate suppliers/vendors. Company may find that the current arrangements for distribution of finished goods may no longer be optimal with the removal of the concept of excise duty on manufacturing

For instance, Ultratech Cement states that its depots will come down to 100 from 550 at present.

This will call for a review and possible alteration of current network structure and product flows. Thus invariably, HR will have to play a crucial role in manpower planning

Accounting, legal and IT systems

As part of the GST rollout, there would be substantial changes in areas of master data, supply chain transactions, system design. Similarly supply chain reports (e.g., purchase register, sales register, services register), other tax reports and forms (e.g., invoices, purchase orders) will be altered significantly

As part of the transition, HR will need to intervene in ensuring training of employees for compliance under GST


There would be certainly be far reaching ramifications from a financial standpoint, which impacts the companies and employees alike. HR department must play a pivotal role in understanding clearly every detail about GST as it will affect some of their HR services while also indirectly affect or impact their employees.

Higher Profits leading to Higher Variable Pay


(Source: ET)

Companies across sectors could generate substantial savings in logistics and distribution costs as the need for multiple sales depots will be eliminated and inventory holding costs are rationalised.

Consider the case of FMCG companies like Hindustan Unilever, Colgate, GSK and Asian Paints. They pay nearly 24-25% including excise duty, VAT and entry tax. With GST at 17-19%, they will pay lower taxes. Warehouse rationalisation and reduction of overall tax rates, is expected to generate saving which could cumulatively range between 200-300bps.

Similarly, consider the cement players like UltraTech, ACC, Ambuja and Shree Cement which pays nearly 25% tax. If GST rates are fixed at 18-20% then the overall tax incidence will be lower GST is expected to lead to savings in transportation cost, which currently comprises up to 20-25% of total revenue

Where variable pay is linked to company performance, higher company profits could lead to higher pay-outs for the employees

The caveat here is that given the intensity of competition in the FMCG/Cement Industry, probably tax savings resulting from the GST structure would lead to re-pricing of products as companies take a  re-look at margins or price mark-ups to retain market share


Inflation (Short-term)


Countries like Canada, Australia, and New Zealand have seen one-time increase in inflation post GST implementation, which normalized in a year.


In Malaysia, CPI for first 5 months marked increase by 1.2 % as compared to last year

In India, the interesting aspect about the existing indirect tax structure is that it has a fairly limited impact on retail inflation as measured by Consumer Price Index. This is because items that have a significant weight in the CPI basket are exempt from some taxes.

For instance, 75% of CPI is exempt from excise duty and 47% of CPI is exempt from sales tax.

A standard goods and services tax (GST) rate of 18-20% will not lead to significant inflation but a higher rate can fuel inflationary pressure. ating agency does not expect consumer price inflation (CPI) “to go beyond 5.2-5.3% vis-a-vis the 5% expectation”

Nomura has predicted that In the short term it may well end up negatively impacting growth and push core inflation up by 10-40 basis points (bps)

Higher surplus for your company’s employees (Long –term)

Currently we have a host of Central Taxes as well as State taxes and levies:


4Now that they would be subsumed in the GST, look at the implications for the common man in simple terms.

In the example given above the cost of the raw material is Rs 100. The manufacturer and the retailer add Rs 20 value each. The tax rate is assumed to be 10 percent for all taxes.


Under the current tax regime, both excise and sales are a value added tax system. However, there is no set-off for the taxes paid. So with raw material of Rs 100, the final price the consumer pays is Rs 167.2 with tax component of Rs 27.2.

Under GST, there is input tax credit. This means each person pays tax only on the value added by her. So the overall tax for the consumer comes down.  The final price the consumer pays is Rs 154 with tax component of Rs 14

So the cascading effect or double taxation – the consumer pays tax on tax already paid by the manufacturer, will be normalised

Impact on the Unorganised Sector


At present, the market share for the organised sector is about 65-70%. Effective tax correction practices under the GST regime will ensure that the price difference amongst the unorganised sector and the organised sector is narrowed as the parallel economy will stand to lose its competitive advantage due to tax compliance.

Consider an employee just after 1st April 2017 send his car for routine service at his regular workshop which he is entitled for car maintenance claim not exceeding Rs 1000 per service and stated within his employment contract. Unfortunately, the service operator charges him Rs 1300 inclusive of labour charge.

When he questions the workshop owner as to why the cost had suddenly increased, he mentions that his suppliers are charging him GST for supply of car parts and tools, so he has no choice but to increase his service fee. If your employee requests for Tax Invoice from the service provider, he claims that he did not register because their revenue did not exceed the threshold and more over it is small workshop operating with only the owner who is also the chief mechanic and his son who assist him. He had no choice but to submit the normal bill to Finance via HR/Admin department. Unfortunately, he was told that the maximum reimbursement is only Rs 1000 whereby the balance of Rs 300 shall be absorbed by him.

Would your employees press for revisions of limits? Would it not be better if you do it proactively?

Travel Costs


Flying to become expensive, as service tax will be replaced by GST. Service tax on fares currently range between 6% and 9% (depending on the class of travel). With GST, the rate will surpass 15%, if not 18%, effectively doubling the tax rate.

Thus the need to probably find 4G as an effective alternate to travelling J

Summing Up


The alarming fact is that Almost 98% of Indian companies are not ready with software infrastructure, accounting systems and human resources training for the roll-out of Goods and Service Tax (GST) that the government is targeting to roll out from April 1 next year.

As J.P Kotter in his change management model said “Change must be planned with a process of step-by-step guide.” The HR function must begin to work in earnest to prepare itself for life after GST.