Transforming Procurement to keep up with Digital First Economy
Date: Friday , March 03, 2017
Indian Economy, the 6th largest economy in the world (by nominal GDP), is passing through a tunnel of several reforms which are being introduced by the government led by Narendra Modi aiming at long term progressive growth. The reforms are seemingly forward looking, encompassing a wide spectrum of growth aspects including way of doing business and of day-to-day commerce by common citizens casting a deep impact on the current business processes.
The Current Economy and the Enterprise Goods Procurement Industry
To understand the situation and impact better we need to see the fundamentals of the current economic characteristics. It�s a cash-intensive economy, wherein more than 95% transactions happen through cash � 4 times higher than other fast growing developing countries like Brazil, South Africa & Mexico. Cash-to-GDP ratio of 12% also makes it one of the most cash-centric economies in the world with more than 86% cash transactions happening in high-denomination notes, which are INR 500 & above.
Let�s also understand the enterprise goods procurement scenario in this context. Non-Corporate-Small-Medium-Business sector (NCSMB), which is also the backbone of the country�s economy, caters largely to the business-to-business and enterprise goods procurement supply chain. From manufacturer to distributor to dealer to retailer � this linear chain of supply chain players have been serving the goods procurement industry on a complex cash-credit mechanism for years. It�s majorly relation-based with �trust factor� playing a key role without having any robust or widely accepted practice of procedural and systematic transparency. The entire industry is governed by the Indirect Tax regime that has been one of the most complex and ambiguous in nature dividing the country into smaller taxable zones with disparate tax rates. So, saddled with so much complexity in tax systems and opaque, archaic business processes, the enterprise goods procurement industry was lagging behind for long.
The Reforms Paving the Way for the Paradigm Shift: Demonetization & GST
The two major reforms � one already implemented and another on the way � are the biggest examples and drivers of this newly set of reforms taking the economy by storm. �Demonetization�, the one implemented in November 2016 and �GST�, slated to be rolled-out from April-September 2017, are the two reforms that are driving the Indian economy towards a digital transformation, impacting the business processes and largely the enterprise goods procurement industry.
Demonetization is leading to cash-less economy wherein all financial transactions are being enforced and incentivized to be completely digital through plastic money, banks transfer, cheque and others. It�s a drastic change in the way any financial transaction is happening in the country leading business, enterprises to adapting to digital payment settlements.
GST will bring the entire nation to one economy, which was other wise, a fragmented one under various state-wise indirect tax regimes. Seamless integration and easy filing platform with GSPs (GST Suvidha Providers) and ASPs (Application Service Providers), the digital transformation will strengthen the indirect taxations in the country paving the way for a more transparent business processes across NCSMBs and Corporates a like.
Digital Transformation Life Cycle: From Expense to Investment to Compliance
Digital Transformation of various aspects of doing business or institutional processes has been a luxury or forward-looking investment for many. If we look at the overall life cycle of Digital Transformation it has witnessed a change from being treated just as an �IT expense� in books to �Strategy & Operations investment� and being treated now as a necessity. Digital Transformation is the tool to maintain and improve the level of transparency � and the latest reforms are just the manifestations of adopting this tool quite openly.
Demonetization forces all the business and enterprises to maintain a transparent book which can be monitored and tracked digitally for tax compliance. All the financial transactions pertaining to any procurement activity need to be processed on the digital books instead of cash-based ledger system to make all the expenses or investments declared on a real time basis.
GST, on the other hand, forces all businesses and enterprises maintain their purchase or procurement ledger digitally filed onto the GST platform to claim their Input Tax Credit (ITC) against the sales ledger. That means, the suppliers need to be compliant as well, matching their sales ledger with the inward supply ledger of the buyer (GSTR1/2 & 3). This integration of buyer-supplier system on a single digital platform for Tax collection purpose has been made necessary to reconcile taxes payable that can directly impact the bottom line for both the organizations.
Government�s Initiative as an Example of Digital Transformation in Procurement
Government-e-Tenders (GeT) � a digital tendering system, to be used by all Central Government departments for goods procurement, witnessed massive reforms too to make government spending more digitally transparent from now on. It enabled the paying authorities to engage in digital procurement systems and platforms for spending more than INR 50,000 and payment release within a short period of 10 days.
The forward looking shift towards this direction in reality will have the enterprises following in the footsteps of the overall economy which is all set to become digital economy like that of the developed ones. Amidst all this macroeconomic conditions, it would be quite prudent to make strides towards this vision as necessity has been just created in terms of demonetization and has gradually been shaped up for catalyzing the spurt of transformation in terms of GST implementation.