Project Log

When Hero Honda shifted to VAT

Hero Honda Motors changed its financial package to comply with VAT. S R Balasubramanian, the company’s Vice-president of Information Systems, and Surendra Chhabra, its General Manager, Finance, share details of the transition.

S R Balasubramanian Vice-president Information Systems Hero Honda

Hero Honda Motors became one of the first companies in India to tweak its financial processes to comply with the VAT (Value Added Tax) norms that were adopted by the Haryana government in April 2003. Haryana was the only state in the country to implement VAT in that year even as confusions reigned over its implications.

The biggest task before us was to change over to the new system without disturbing the existing set of processes (financials) which were part of the SAP ERP system—SAP R/3 version 4.6 B. (Later in 2004, we migrated to SAP R/3 4.7 enterprise version.) Before the actual transition, it was important to ensure that it took place smoothly without any interruption hampering the business processes. The ERP system had to successfully comply with the new system and follow the new tax laws from the first day of the financial year starting April 2003 without using the old system as a backup. Additionally, we wanted to ensure that the sequence of applying the new VAT-enabled patches was rigorous. Our in-house team and end-users affected by these changes were actively involved in the exercise.

Understanding the norms

In January 2003, SAP called a meeting in Bangalore which included representatives from various companies along with legal tax experts from different state government departments. The meeting was aimed at discussing the norms of the new taxation system and how a smooth transition could be made to it. Following discussions with the experts and representatives, SAP went ahead with creating new patches to comply with VAT. In the course of time, modified patches were released by SAP. However, there were some apprehensions as to whether the VAT regime would be implemented effectively. There were concerns as to what changes would be required in the existing tax administrative set-up, how the new tax-entry system would work on the existing SAP structure, what configuration changes would be required as per our industry, and the impact of VAT on it. We had to close the existing tax codes and move ahead with the new ones. The transition had to be carefully handled as the changes were going to directly impact purchase, sales and all financial dealings. All the account backlog had to be cleared by March 31, 2003 before shifting to the new tax system. Most of the backlog was at the bill-processing stage. Since our financial results are announced by the 11th or 12th of April, we were able to overcome the bill-closure backlog without any hassles.

Then came the transition phase during which simultaneous entries would be maintained for all sales, purchase and relevant operations under the old tax regime and the VAT structure. One of our advantages was that we had a single point of sale at Haryana and an arrangement that simplified tax payments on sales, especially after the state switched to the VAT system. Also, motorcycle sales do not attract variations across states. Because of this, we have to follow fewer tax codes, at around 50, than most other companies. For those with multiple manufacturing and distribution centres, the tax codes would have run into thousands. Broadly speaking, each tax code defines the tax regime under which the tax has been paid, the jurisdiction, and whether the tax will be set off or not. With all purchase orders having different codes, the change of protocol involves changing tax codes. The major shift in the system involved changes in the withholding taxes (TDS or tax deducted at source).

Testing the patches

The new patches were tested on the development server, and all the tolerance checks were performed on the quality server. These were then transferred to the production server at the final stage. During the trial run, people from the finance, material, production and technical departments supervised the changes. This was necessary to ensure that any change brought about would not affect the department’s work, and that the department was geared to deal with the new changes without its work being affected. Testing various modules, with a special focus on manuals that reflected other modules, and integrating these along with the development and production platforms continued through the second half of March 2003. Midnight of March 31, 2003 saw the new system going live on the production server, with non-critical areas going live on April 7, 2003.

The new patches did not require any additional investment on our part, and the main challenge after the implementation was to train our people on the new system, which was done over time. We have people to monitor the new system and the functioning of the patches. In future, any changes that come into the central sal es tax structure will be handled by working with the ERP vendor to make the changes as per the new policy.

— As told to Abhinav Singh

abhinav@expresscomputeronline.com