Simplifying Stock Purchase Methods under GST

Introduction

Goods and Services Tax was enforced in 2017. It revolutionised the taxation of India. GST is a unified tax system that replaced several indirect taxes. Such a wide range of applicability resulted in a variety of implications for diverse business sectors, including the selling, transferring, and buying of stock or inventory.

Understanding the complexities of the GST, especially when dealing with stock, is crucial to ensure smooth tax compliance. However, if you do not understand the GST stock purchase, read this article below. But first, let’s understand what the different stock purchase methods are.

Different Stock Purchase Methods

Stock purchase refers to the acquisition of goods or materials that a business needs for its operations. Efficient management of stock is crucial for businesses to balance the costs associated with ordering and holding inventory. Here are three prominent GST compliant stock buying methods:

1. Economic Order Quantity (EOQ)

EOQ identifies the ideal order quantity, minimising the total costs of ordering and holding inventory. Balancing ordering and holding costs prevents overstocking or material shortages, optimising inventory management.

2. Material Requirements Planning (MRP)

MRP integrates inventory with production schedules, ensuring timely availability of materials. It tracks demand, plans for raw materials, and schedules production, reducing stockouts and excess inventory for an efficient production process.

3. Days Sales of Inventory (DSI)

DSI, a performance metric, gauges inventory turnover efficiency. Calculated by dividing average inventory by the daily cost of goods sold, a lower DSI reflects efficient management. Monitoring DSI helps identify areas for improvement, such as reducing overstock and streamlining the supply chain.

Impact of GST on Stock Purchases

Simplifying GST compliant stock buying methods becomes imperative due to the shift in taxable events from sales to supply. Industries like FMCG and Pharma are significantly impacted, necessitating a reevaluation of procurement strategies and financial considerations. Several key aspects need attention to streamline stock purchase methods under GST:

1. Procurement Contracts

Under GST, businesses must reassess and potentially renegotiate procurement contracts. Understanding the tax implications on stock transfers helps in optimising costs and maintaining compliance.

2. Adapting to E-way Bills and Compliance

Introducing e-way bills and compliance requirements at checkpoints necessitates adapting delivery schedules and optimising operating costs. Businesses should strategise to ensure competitive pricing while adhering to regulatory obligations.

3. Managing Working Capital Blockage

Seasonal industries face challenges with working capital blockage, particularly when sales occur in specific periods. Entrepreneurs must devise strategies to mitigate the impact, whether through better credit management or alternative financing arrangements.

4. Transparent Valuation Methods

Adopting transparent valuation methods is crucial, given the potential for detailed scrutiny by tax authorities due to high volume transfers. A suggested approach could be a cost-plus method, incorporating a certain percentage.

5. Reviewing Free Supplies and Discount Schemes

GST prompts a reevaluation of free supplies and discount schemes. Businesses need to align these practices with the new tax framework to ensure compliance.

6. Product Pricing Strategies

With the impact on procurement costs, businesses need to reevaluate their product pricing strategies. Adjustments may be necessary to maintain competitiveness while factoring in the implications of GST on the overall financial landscape.

Effective Stock Management Strategies under GST

In the context of the GST, effective stock management strategies become essential to optimise costs and ensure compliance. Businesses must explore the complexities of GST while implementing inventory management approaches that align with the new tax framework. Here are some strategies for effective stock management under GST:

1. Adopting Just-In-Time (JIT) Principles

JIT involves purchasing stock precisely when needed, which minimises inventory levels. Thus, businesses can reduce storage costs, enhance cash flow, and remain agile by adopting JIT. However, this approach demands accurate demand forecasting and robust supplier relationships to avoid disruptions.

2. Balancing Bulk Buying for Cost Savings

Bulk buying secures discounts and lowers ordering costs. However, it can tie up a significant amount of capital and increase storage expenses. Under GST, businesses must strike a balance, particularly for items with stable demand and longer shelf life. Therefore, a careful assessment of the trade-off between savings and holding costs is crucial for efficient stock management.

3. Exploring Dropshipping Opportunities

Dropshipping is a method where products are sold without holding inventory. Under GST, businesses can adapt to the tax framework’s requirements by minimising upfront investments and overhead costs. However, challenges may arise in maintaining control over shipping and product quality.

4. Aligning Stock Levels with Demand Dynamics

Effective stock management under GST requires a close alignment of stock levels with dynamic demand patterns. This strategy necessitates regularly reviewing and adjusting inventory levels based on market trends.

5. Implementing Technology-driven Solutions

Automation facilitates real-time tracking, ensuring timely compliance with GST regulations. Thus, technology-driven solutions like advanced inventory management software can enhance efficiency and accuracy. 

Challenges and Solutions in Stock Purchases under GST

While GST offers benefits like improved supply chain efficiency and input tax credit in stock purchases, it also presents some challenges in stock purchases. Here’s a breakdown of the key hurdles and potential solutions:

Challenges:

1. Increased Cost of Inventory

GST implementation has brought a 5% tax on certain goods like agricultural products, escalating purchase costs. Such an increase in GST rates for some items compared to pre-GST regimes results in elevated purchase expenses.

2. Input Tax Credit Complexities

Claiming Input Tax Credit (ITC) involves strict documentation, posing challenges for businesses. Moreover, certain transactions necessitate upfront GST payments, adding pressure on cash flow.

3. Compliance and Reporting

Rigorous record-keeping of inventory levels, purchase dates, and GST rates for compliance proves demanding. Moreover, timely preparation and filing of GST returns can be a tedious and error-prone task.

Solutions:

1. Leverage Technology

Automated tax calculations and return filing through accounting software reduce manual errors. Thus, automation of record-keeping, ITC tracking, and e-way bill generation streamlines operations. 

2. Invest in Training

Empower employees with training on GST procedures, ITC claiming, and effective inventory management. It will keep your workforce informed and prepared to effectively handle numerous GST compliance requirements.

3. Supplier Selection

Choosing registered suppliers ensures effective ITC claiming and simplifies paperwork. So, build strong ties with reliable suppliers to facilitate timely deliveries and quality control.

Best Practices for Optimising Stock Purchases

Optimising GST stock purchase is a critical aspect of efficient inventory management. Implementing best practices ensures that businesses can strike the right balance between minimising costs and maintaining adequate stock levels. Here are some of the best practices for optimising stock purchases:

1. Demand Forecasting

Implementing precise demand forecasting involves the automated selection of tailored algorithms for diverse spare items. Clipping and filtering techniques manage abnormal data, enhancing accuracy across the inventory.

2. Lead Time Forecasting

Forecasting average lead time using historical purchase order data anticipates replenishment needs. Calculating lead time variance aids in assessing accurate service levels and informs safety stock decisions.

3. Issue Size Forecasting

Forecasting average issue size based on historical data facilitates efficient stock management. Calculating issue size variance provides insights for determining expected service levels.

4. Economic Modeling

Economic modelling explores trade-off decisions, considering holding costs, replenishment expenses, expediting, and stockout costs. Criticality and duration analysis optimises decisions aligned with economic efficiency.

5. Optimisation of Reordering Parameters

Optimising MIN/MAX levels involves algorithm selection aligned with item characteristics. Economic cost models enhance optimisation by considering holding and replenishment costs.

6. Exception Management

Management-by-exception streamlines inventory reviews, focusing on high-value items. Tools defining and managing exception conditions efficiently navigate complex inventories, addressing critical issues promptly.

7. Inventory Segmentation

Categorising items based on characteristics allows tailored policies for effective management. Segmentation recognises the nature of diverse items, improving overall inventory management efficiency.

8. Spares Risk Assessment

High-value spares undergo meticulous risk assessment. Risk modelling evaluates stocking decisions’ impact, while sensitivity analysis provides a comprehensive view of demand and stockout cost variations.

9. Spares Pooling

Pooling infrequent, high-value items across sites reduces safety stock investment. Identifying common spares for sharing and determining optimal locations enhance efficiency and reduce costs.

10. Knowledge Capture

Implementing a knowledge capture system maintains organisational knowledge. It serves as a repository for decisions, creating an audit trail. Timely reminders ensure data quality and prevent oversights in inventory management.

11. Reporting Inventory KPIs

Effective reporting of KPIs is crucial for informed decisions. Providing predefined reports and customisable options ensures flexibility in monitoring and adapting inventory strategies based on evolving business needs.

Conclusion

Optimising stock procurement with GST requires a thoughtful and inclusive approach. Businesses can streamline their supply chains by combining economic order quantity models and days sales of inventory metrics. 

However, tackling some of the challenges can be tough, but the above-listed solution can prove to be handy. Businesses adopting these simplification strategies are better equipped for smooth operations, cost savings, and compliance in their stock procurement under GST.

Also Read: What Are The Benefits Of Integrating GST Registration With Your Invoice/ Billing Software?

Frequently Asked Questions

• What is opening and closing inventory?

“Opening” marks the beginning, and “closing” indicates the end of a time period. Monthly inventory assessments for a bar on the last day of each month provide insights into monthly performance.

• Can you deduct inventory?

The inventory accrual method is essential if you monitor your overall inventory balance, indicate the total cost of all items in your possession, or provide representations related to it. With this method, you deduct the inventory cost when the items are sold, allowing for a more accurate representation of your business’s actual financial standing and performance.

• What is 37 a rule in GST?

As per Rule 37A of CGST Rules, 2017, taxpayers must reverse the Input Tax Credit (ITC) claimed on invoices or debit notes if the supplier has furnished details in their GSTR-1/IFF but hasn’t filed the GSTR-3B return for that period until the 30th day.

• How do you calculate inventory?

The fundamental formula for determining ending inventory is: Beginning inventory + net purchases – Cost of Goods Sold (COGS) = ending inventory. The beginning inventory is the concluding inventory from the previous period, and net purchases include items acquired and added to the inventory count.

• How do you record the purchase of inventory?

Inventory purchases are documented as a debit (D) entry in the sales operating account, specifically under an Inventory object code.

• Do you include GST in inventory?

Inventory items are not subject to Goods and Services Tax (GST) with an input taxed status.

• What is inventory write-off under GST?

When any portion of the inventory becomes entirely obsolete and unusable, it is necessary to eliminate its entire value from the books of accounts or inventory valuation. This process is referred to as a complete write-off of the inventory value.

• Is GST included in the cost of inventory?

No, if you are eligible to claim input GST on the sale of inventory, it should not be factored into your considerations. In cases where you’ve acquired goods with paid GST, you can offset it during the sale by using it as input GST credit. However, if claiming input GST is not an option, it’s prudent to include this cost as part of your inventory.

• What is Section 35 of the GST?

Section 35 of the CGST Act, 2017, and Rules 56, 57, and 58 of the CGST Rules, 2017, under the category of “Accounts and Records,” mandates that every registered individual must preserve and manage all relevant records at their primary business location.

• Does the inventory include sold items?

In every scenario, inventory refers to items that a company intends to sell to another party. The cost associated with inventory is treated as an asset until the items are sold. Once the merchandise is sold, the cost transforms into an expense, known as the Cost of Goods Sold (COGS).

Shivam Sharma

Shivam Sharma is a penultimate-year BBALLB (Honours) student passionate about crafting insightful content in the finance niche. He remains well-informed through continuous engagement with the latest news, ensuring that his content reflects the most current and relevant insights. Shivam Sharma's unique strength lies in his comprehensive understanding of both the legal and business facets of various topics. This dual expertise allows him to present well-researched content, making him a valuable contributor in the field of business and finance content creation.

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